Uncertain outlook for NI construction industry

Just over a third (34%) of Northern Ireland’s largest construction companies are struggling to stabilise their business activities, while 16% are operating in survival mode, according to the latest quarterly survey from the Construction Employers Federation (CEF) and PwC.

In contrast, the proportion with profitability or growth as their priority actually fell from 50% in Quarter 1 2015 to 38% in the following three months.

The latest quarterly survey of Northern Ireland’s construction companies shows that, in the three months to the end of June, only 19% of all the firms surveyed were operating at full capacity – down from 21% in the second quarter of 2014.

Key findings from the survey include:

· 34% of Northern Ireland’s largest construction companies say their main priority over the next 12 months is to stabilise their operations

· 14% have an objective of increasing profitability over the next 12 months

· 16% of all companies were operating at less than 50% capacity in the second quarter of 2015, marginally up from 14% in Q1 2015

· 22% of all companies reported an increase in workload during Q2, down from 28% in the first three months of the year

· 24% of all companies increased their employee numbers over the same period, with 19% reporting that their total employment numbers had declined

Commenting on the survey, Dr Esmond Birnie, PwC’s chief economist in Northern Ireland said the survey results reflect other economic data which suggested that recovery is slowing:

“These relatively downbeat data reflect the Ulster Bank Purchasing Managers Index for August, which shows declining levels of output, orders and employment.

“Putting the survey in context, since 2007, Northern Ireland’s construction industry has been the most severely impacted sector in terms of both output and employment.

“The impact of the financial crisis on the industry here was considerably worse than in GB; and, while local constriction companies have won considerable volumes of new work in GB, the current level of output in Northern Ireland alone remains around 40% below the level experienced pre-2007.

“Looking forward, there is no clear consensus of sector-wide optimism; a third (33%) of companies expect economic prospects in Northern Ireland to improve; a fifth (21%) of respondents expecting things to worsen, while 38% foresee no change.”

The CEF/PwC analysis suggests that a number of factors could account for the lack of confidence in the local industry, including the implications of recent budget difficulties facing the Northern Ireland Executive and the reduction in the roads maintenance budget.

Despite the indications of recovery in the NI housing market, where both prices and activity levels are rising, there is little evidence of a sustained bounce in private housing building. The market remains fragile, largely because of the debt overhang from the boom in the mid-2000s.

CEF Managing Director John Armstrong also warned that workload and employment levels were being boosted by companies operating outside Northern Ireland:

“There is increasing evidence of companies reporting increased workload and employment, but where orders were being won in London, Manchester and other construction hotspots in GB where workers are commuting to work outside Northern Ireland.

“In 2014, we estimated that the largest local construction companies generated up to two-thirds of their turnover – over £1 billion – outside Northern Ireland. But, as much of this evidence remains anecdotal, we have now expanded our quarterly survey to include work undertaken outside Northern Ireland– even where the workers are being paid in Northern Ireland.

“We will report on these findings in future surveys but, in the absence of major public and private contracts here in Northern Ireland, some of our biggest firms may find the GB market more buoyant and more profitable. That could mean that, if the local market returns, the construction companies, may not.

“Overall however, while the sector is in a stronger position than when it was at its lowest point after the banking crisis, confidence is lukewarm, output remains between half and two-thirds of the pre-2007 level and there are headwinds around the medium-term economic picture.

“Chief amongst these headwinds is the continuing political malaise at Stormont, where a breakdown of communication, trust and decision-making around the Executive table has left a huge sense of frustration and anger within the construction industry.

“November’s Spending Review will set the Executive’s budget envelope for the next four years and the industry expects the outcome to prompt speedy decisions as to how the already developed pipeline of work will be delivered.

“This industry previously contributed around 7% of total regional GVA and was a leading employer, where one construction job contributed to support up to four downstream jobs across the economy, many in rural areas where other industry is sparse.

“We have the capacity, the skills and the determination to regain that position, but the current political impasse is simply not acceptable. Confidence remains fragile, investors remain uncertain and our political leaders need to lead so we can deliver an agreed pipeline of work that will contribute to employment creation and economic regeneration.”

Oliver McAllister, PwC director and construction and real estate leader, says the CEF survey supports the wider contention that recovery is slowing;

“Since the autumn of 2014 overall measures of business confidence have been mixed, but generally indicating that economic activity is growing more slowly than the UK average. Monthly unemployment figures are also suggestive of some loss of pace in the rate of improvement in the economy

“Today’s CEF survey results are consistent with the Northern Ireland Composite Economic Index, with PwC also forecasting a slowdown in economic growth rates; from 2.2% last year to 1.8% this year and 1.7% in 2016.

“Overall, therefore, combining the wider economic indicators with the state of trade survey, we remain apprehensive about the outlook for the construction sector in Northern Ireland.”