Boom-bust cycle adds to low construction sector productivity

Boom-bust cycle adds to low construction sector productivity

Oct. 14 (BusinessDesk) – The boom-bust cycles that drive the New Zealand construction industry are adding to its low productivity, says accounting firm PwC in a report for the Construction Strategy Group.

The sector lobby group had Minister for Building and Construction Maurice Williamson launch the report in Auckland, as part of an effort to focus government attention on the skills shortages likely because of the Christchurch rebuild and the potential for an industry bust after that surge of activity concludes.

The earthquake restoration work, combined with nationwide leaky homes action and upgrades to seismic strengthening offer “the prospect of the largest construction-led boom” in New Zealand’s history.

“Do we currently have enough skilled people to do the work?” the report asks. “How do we ensure the greatest building boom ever is not followed by the greatest bust?”

Among proposed answers to that prospect are greater planning of capital spending by local and central government, encouragement for public-private partnerships to accelerate public infrastructure projects, tax changes to discourage property speculation, and adding employment targeting to the Reserve Bank’s sole focus on inflation.

The argument to curb residential housing boom-bust cycles is based on research showing this part of the construction sector is the “major driver of volatility.”

The report shows how the building industry boomed through early to mid-2000’s on the back of the residential property speculation boom, adding 60,000 jobs between 2000 and 2007, “almost 50 percent more than any other sector in New Zealand.”

In the recession that followed, the sector then experienced “by far the largest decline in employment since the peaks of the boom years.”

These trends, in turn, are encouraging low investment in relevant skills and allowing large numbers of construction sector workers to deal with downturns by simply leaving the country, possibly never to return.

This high volatility compared to other parts of the New Zealand economy was almost certainly contributing to the construction sector’s poor record of labour productivity, which is the subject of one of the first investigations by the newly formed Productivity Commission.

The sector was also the fourth lowest paid, which also reflected its tendency to pick up large numbers of relatively unskilled workers.

“Volatile cycles in the construction sector do not allow it to build and maintain capacity, or to plan more than a few years out because there is no certainty over any length of time,” the PwC report says.

Yet even a 1 percent improvement in the productivity of the sector would be worth $300 million a year to the New Zealand economy, PwC says.

While government spending could help smooth out cycles in the construction sector, its current contribution to construction spending was about a quarter of the annual total, meaning it could only partially offset big changes in private sector activity.

Better planning of capital and infrastructure spending, along with more use of PPP’s, would both be ways to increase the government’s capacity to dampen volatility in the sector.

The report also suggests that employment targeting, which is common in other countries’ monetary policy settings, could be added to the Reserve Bank’s single-minded focus on low inflation.

The New Zealand Institute, a think-tank, last month also called for the government to consider changes to monetary policy, including using quantitative easing – otherwise known as printing money – to help float the economy through recessions.

(BusinessDesk)

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