Wednesday 16 October 2019

Conall Mac Coille: Surge in building costs and skills shortages can hammer State plans

The construction sector, which has been tasked with building 30-40,000 homes a year, needs help if it is to meet targets and rising demand Photo: Bloomberg
The construction sector, which has been tasked with building 30-40,000 homes a year, needs help if it is to meet targets and rising demand Photo: Bloomberg

Conall Mac Coille

Last week's Society of Charted Surveyors (SCSI) report indicated build-cost inflation will be an enormous 7pc through 2018. Construction companies cited skills shortages, and raw materials prices, driving build costs upwards. Build costs are expected to hit peak Celtic Tiger era levels in early 2019.

This is a troubling observation. Looking forward, the construction sector is tasked with building 30-40,000 homes a year while fulfilling the National Development Plan for infrastructural investment and social housing.

The Government is planning to double capital spending to €9.5bn by 2021. On the basis that Ireland's recovery remains on-track, demand for commercial development will grow, both from indigenous companies and the multinational sector.

That's a lot of competition for the limited resources within the construction sector - which is bound to lead to additional cost pressures. So addressing skills shortages, and helping to raise capacity within the construction sector should be a key priority for government.

The scale of the challenge was laid bare in a recent Ibec report on improving housing supply. Ibec estimated that construction employment will need to grow by 80,000 by 2020 to meet demand.

Unfortunately, there is no longer a large pool of former construction workers ready to take up employment. One in two jobs lost in the recession was construction-related - but these workers have now largely emigrated.

Ireland now needs to attract skills from abroad. During the Celtic Tiger years, inward migration from Eastern Europe helped to satiate demand.

However, Poland and the Czech Republic are now among the fastest-growing economies in Europe. So it will be more difficult to attract migrants this time around.

Brexit may help, with UK construction activity now slowing, but Ireland will probably need to attract workers from non-EU countries.

As the recent Ibec report points out - the review of our work-permit regime should not only focus on attracting skilled workers from abroad, but aim to alleviate general labour shortages in the construction sector.

Bringing the emigrants home

The problems facing the construction sector highlight that labour shortages will soon become apparent across a broader range of sectors, as the unemployment rate falls below 5pc. Thankfully, Ireland is enjoying a strong natural increase in the population. CSO data show 61,000 people will celebrate their 18th birthday in 2018, far in excess of the 44,146 who will celebrate their 65th, helping the labour force to grow by 32,000 over the past 12 months to 2.4 million.

In 2017, immigration of 84,600 exceeded emigration of 64,800 - adding 20,000 to Ireland's population. Furthermore, 78pc of inward migrants last year were between 15 and 44 years old, the key working age groups. Far from the crude cliche of migrants as typically unskilled workers, over half of immigrants in 2017 had third-level qualifications. It should be remembered that Ireland experienced five straight years of net outward migration through 2010-2014, averaging 20,000 a year, or 100,000 in total. This is an enormous amount of people - almost equivalent to the current level of unemployment of 120,000.

The key point is that net migration has acted as a safety valve. Those who became unemployed during the recession often sought employment opportunities abroad. Had they stayed at home, the unemployment rate would be far higher than 5pc, putting pressure on the social welfare system.

The challenge now is to bring emigrants back home, as labour shortages start to emerge.

However, it can't be taken for granted that Ireland will attract migrants in sufficient numbers.

Housing affordability, childcare and high marginal tax rates all act as a disincentive to return home. Ireland is well known as priding itself as a leading country in which to do business. It should also consider its attractiveness as a location to work, even if this requires unpopular decisions on the taxation of higher income earners.

Brexit takes its toll on sterling

The big currency move last week was sterling pushing through 90p against the euro for the first time in 2018. The catalyst was commentary from British trade secretary Liam Fox that a 'no-deal' WTO-type Brexit now seemed likely, followed up by reports that Theresa May is planning a cabinet meeting to prepare plans for such as scenario.

How seriously should these threats be taken? For now, hard-line Brexiteers within the Conservative party appear to have won the argument that the UK should appear to be preparing for no-deal, if not with any genuine prospect of success, at least in order to improve the British government's hand in the negotiations.

However, the efficacy of this strategy has been undermined by Fox and other Brexiteers openly setting it out in the national media. The motivation may be to gain leverage in the negotiations, but the UK government will not be prepared to pay the price for such a disastrous outcome. So Michel Barnier isn't going to be fooled.

First, an exit on WTO-type rules would almost certainly lead to a general election, with Theresa May opening the door of 10 Downing Street for Jeremy Corbyn.

Second, the UK economy will suffer most should it leave the EU under WTO type rules - not only implying tariffs on exports to the EU, but also undermining the regulatory and legal basis for goods and services trade. Threatening to push your own economy into a deep recession is not a credible bargaining chip.

Notably, sterling's decline has come despite the decision by the Bank of England (BoE) to raise interest rates to 0.75pc.

Unusually, the decision to tighten monetary policy attracted the ire of the Financial Times, arguing in its editorial the BoE had hiked in the expectation, rather than the reality of faster rises in wages and prices, and that there was good cause to wait given Brexit uncertainties.

Some investors are already betting on a rate cut by March 2019, on the basis that the UK's economic performance will slow sharply.

If so, outgoing Governor Mark Carney's decision to raise rates will surely be seen as a mistake, an ignominious end to his time at the BoE.

What does sterling's weakness mean for Ireland? At 90p against the euro, the exchange rate will squeeze indigenous Irish exporters' profit - especially hurtful for smaller companies in the agri-food sector where margins are wafer-thin. However, the overall impact on Irish GDP growth will be muted by multinational sector, for whom the UK is a less important export destination.

The far bigger issue is whether calm heads will ultimately prevail, so the UK effectively stays within the single market beyond March 2019. The cost of doing otherwise is too great, even for the Brexit hardliners whatever they might say.

One way or the other, a fudge on the Irish backstop, an extension of the Article 50 exit process, or a capitulation by the UK government is likely - maintaining the status quo - irrespective of the sabre-rattling this week in London.

Conall MacCoille is chief economist at Davy

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