After having returned to growth in June, construction activity in Ireland saw a renewed decline in July, the latest BNP Paribas Real Estate Purchasing Managers' Index shows.
The index also highlighted the first fall-off in new orders in six months.
John McCartney, Director & Head of Research at BNP Paribas Real Estate Ireland, said the decline in activity will not impact the Government's housing targets this year.
Speaking on Morning Ireland, he said, "I think the housing targets will be met this year and surpassed."
He said the contraction in July and throughout the year to date is a legacy of a pullback in housing commencements between April and October of last year.
"I was a bit of a contrarian at the start of this year that we would achieve 30,000 housing completions again this year against the Government's target of 29,000, and at this point, it looks like we will get at least 30,000 new housing completions this year," he said.
The headline seasonally adjusted activity index fell to 45.6 in July from 50.4 in June, dropping back below the 50 no-change mark to signal a renewed fall in total activity in the sector.
The PMI found output has now decreased in nine of the past ten survey periods, and the latest reduction was the most pronounced in the year-to-date.
"Last year's construction slowdown gave way to a progressively less severe contraction through the opening half of 2023, culminating in a return to growth in June. In this context, and given the continued pick-up in housing starts, the back-slide into contraction in July was unexpected."
It showed declines in activity were broad-based across the three monitored categories of construction - commercial, housing and civil engineering, as commercial posted a first fall in six months.
Those respondents that saw a drop in activity at the start of the third quarter often linked this to a renewed weakening of customer demand.
This anecdotal evidence was consistent with the latest data on new orders, which signalled a first reduction in six months. Subdued customer confidence and associated delays in the approval of projects were among the factors leading to the fall in new business, which was solid overall.
The PMI found that despite the drop in workloads in July, construction firms continued to expand their staffing levels. Employment increased for the seventh consecutive month. The rate of job creation was solid and was also the fastest since February.
Continued hiring was consistent with confidence among construction firms that activity will expand over the coming year.
Sentiment picked up slightly from June, but was below the series average, according to the PMI. Firms were optimistic that demand would show signs of improvement over the next 12 months. About 30% of respondents were optimistic in the outlook for activity.
In contrast to the increase in employment, companies scaled back their purchasing activity in July. The fall was the second in as many months and most pronounced since January.
"On a positive note, construction firms reported increased employment for the seventh successive month, and for the tenth time in the last 12 months," Mr McCartney said.
"This demonstrates that building firms are still able to recruit staff despite the tight labour market, and suggests an underlying confidence about the future. This confidence was replicated in the future expectations indicator which remains positive, and which shows a slight increase in sector optimism between June and July."
The drop in demand for inputs coincided with a first shortening of suppliers' delivery times in just over 12 years amid further evidence of supply chains returning to normal.
The rate of input cost inflation picked up in July, after having slowed to a 34-month low in June. The latest increase was still much softer than seen during 2021 and 2022, however.
Around 23% of respondents saw their input costs rise at the start of the third quarter, against 3% that posted a fall.
"The acceleration in input cost inflation also bucked a slowing trend that has been in place since April 2022, and is at odds with the latest Wholesale Price Index data," Mr McCartney said.
"It remains to be seen if the more timely PMI is picking-up early signs of renewed inflationary pressures or whether this is just a blip."
The usage of subcontractors by construction firms increased for the sixth successive month, albeit at only a slight pace that was weaker than that seen in the previous survey period.
Meanwhile, subcontractor availability declined to the least extent since February.