Research assesses if economy has the capacity to meet future activity in the construction sector

Given the strong pace of growth in the Irish economy, this research assesses the capacity of the Irish economy to meet future expected activity in the construction sector. At present, it would not appear that the Irish economy is unduly constrained in terms of labour market and financial sector developments.

The analysis leads to the following general conclusions:

1. Employment levels in construction compared to those over the past 20 years are still quite low as is the proportion of employment in construction.
2. However, in spite of the low level of housing supply at present employment in construction is relatively high. This suggests that employment in construction would have to increase to elevated levels in order for increased housing supply to be provided, in the absence of significant efficiencies.
3. It now appears that much of the additional labour required for housing supply and other construction and infrastructural work would have to be secured through inward net migration; most of this additional labour supply would likely come from immigration.
4. However, the high cost of accommodation may act as a disincentive for workers seeking to come and work, particularly in the greater Dublin area.
5. Credit levels in total are still quite low both by historical and international standards, while the amount of credit presently being used in construction is also low on a relative basis. However, recent trends in the levels of new lending indicate that the stocks are increasing.

The Irish economy would not appear, at present, to be unduly constrained in terms of labour market and financial sector developments. However, it is clear that a significant increase in housing output will result in employment levels in construction returning to levels seen in the run-up to 2007. Such an increase in activity levels will also result in a sizeable increase in the provision of credit by domestic financial institutions. In that regard, the presence of macroprudential policy is imperative in preventing the build-up of another domestic credit bubble.