Construction growth may be key to manufacturing

Demolition in Christchurch. Photo / Creative Commons

Manufactured exports have been faring much better than domestic sales.

Manufacturing should get a boost from the expected surge in construction activity over the next few years.

Analysis of the manufacturing sector by Reserve Bank economist Gael Price concludes that much of the weakness in manufacturing activity over the past few years can be explained by a dearth of demand from the construction sector.

Among manufacturers' domestic markets, which absorb about 60 per cent of total manufacturing output, construction is the one most heavily dependent on manufactured inputs.

Price found that a 1 per cent expansion in construction activity requires a 0.38 per cent expansion in manufacturing activity, spread fairly evenly between four sub-sectors: wood and paper, petroleum and chemicals, minerals, and metals.

Between them those industries represent around 45 per cent of all manufacturing, with most of the rest related to food production.

Manufacturing output fell sharply during the 2008-09 recession and has gone sideways since then. In the June 2012 quarter it was still 9 per cent below its pre-recession peak.

The contraction in construction activity over that period is consistent, by itself, with a cumulative 8.5 per cent fall in manufacturing, Price says.

"Looking ahead, most forecasters now expect a considerable increase in construction activity over the next few years centred on, but not confined to, the post-earthquake repairs and reconstruction of Christchurch," Price says.

Statistics New Zealand's building consents data show consent issuance by value in the residential building sector up 22 per cent in the year to September 2012, compared with the year before, but still 25 per cent lower than in the year to September 2007. Non-residential construction has been much less volatile.

Since the recession manufactured exports have fared much better than domestic sales, reflecting relatively robust growth in Australia and Asia.

While the exchange rate with Australia, their largest market, has been favourable, New Zealand manufacturers have to compete with Asian suppliers in every market, domestic and foreign, and that competition is very sensitive to exchange rates.

"Many of the currencies of the Asian region are pegged, more or less strongly, to the US dollar, meaning that both domestic and exporting manufacturers effectively face competition in US dollars," Price says.

Even before it lurched lower during the recession, manufacturing as a share of economic activity had been declining for 20 years.

Since the late 1980s labour productivity (value added per hour) has been growing somewhat faster in the manufacturing sector than in the economy as a whole, but from a lower base, so that it has only recently caught up with the economy-wide level.

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* September quarter figures showed manufacturing jobs fell by 6100 to 240,400.
* Opposition parties have launched an inquiry into the sector.