Sunday, September 09, 2012
Construction alone can't build the recovery
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

David Cameron has returned to work with a new ministerial team and, instead of freshly-sharpened pencils, some freshly-sharpened policies. In a week in which Britain’s growth was downgraded by the Organisation for Economic Co-operation and Development (OECD), the question is whether they will make a difference.

That downgrade, to a 0.7% drop in gross domestic product this year, is not all it seems. The OECD chose not to assume a statistical bounce this quarter from the Jubilee-affected second quarter, though that was the strong message from Friday's industrial production figures.

Even so, the economy is in serious need of some oomph. The question is whether it will get it. First we need to know what the government is doing.

There will be a new body to make funding and advice more accessible for small firms, probably modelled along the lines of America’s Small Business Administration; not so much a business bank as a one-stop agency.

Most of the flurry concentrated on the beleaguered construction sector, particularly housebuilding. So, on top of the £40 billion of infrastructure guarantees announced in July, there are £10 billion of housebuilding guarantees, to be used for homes for the private rented sector.

Why guarantees? The government believes it cannot reverse the capital spending cuts of the past two years without losing credibility. Though the worst of those cuts is over, it is relying on privately-funded, publicly-guaranteed spending for a boost in coming years.

There will be some tweaks to a planning system that was only recently put into place in March after what the Home Builders Federation describes as a two-year “policy hiatus”. But, while homeowners will now be able to build bigger structures in their gardens without planning permission than before, this is no planning free-for-all.

Housebuilders should get local authorities off their backs when its comes to onerous so-called Section 106 requirements to include a high proportion of affordable homes in new developments. They will be hoping the Community Infrastructure Levy, payable on new developments, is not used as a cash cow by local politicians.

Talk to housebuilders, however, and you get a simple message. Without mortgage availability, the industry will remain in the doldrums. Since the financial crisis fired an Exocet five years ago, cutting off two-thirds of new loans at a stroke, housebuilders and sellers of existing homes have been struggling under this handicap.

While builders welcome anything that makes planning less burdensome, mortgages matter most. The £280m extension of the government’s FirstBuy scheme for first-time buyers is welcome.

Most hopes lie with the £80 billion Treasury-Bank of England Funding for Lending Scheme. If it gets mortgages flowing, building will follow. If not it will remain very depressed. In the 12 months to end-June, new housing starts in England were just 98,670, 10% down on the previous year. Far from building its way to recovery, the industry has been digging into recession.

Three months ago I quoted a paper from the think tank CentreForum by the economic historian Nick Crafts. It stressed the role of housebuilding in Britain’s 1930s’ recovery, on the back of cheap money and an absence of planning controls.

Could history repeat itself? Crafts suggested perhaps an additional 3m new homes are needed, and rolling them out an extra 150,000 a year could generate 750,000 more jobs. I do not disagree with his numbers, though they would require the industry to more than double its output.

The question of whether construction can lead to stronger growth has to confront the fact that, important though it is, it is small relative to the economy as a whole.

Construction accounts for 6.8% of GDP, according to the Officed for National Statistics. New homes are only part of the eector, accounting for under a fifth of construction output last year, just over 1% of GDP.

This arithmetic means even a very substantial boost in construction has only a muted impact on overall economic activity. Let me demonstrate. Construction output in April-June was over 16% down on its pre-recession peak in early 2008.

Suppose, instead of sliding, construction had been flat. Would it transform the GDP picture? No, GDP would be a modest 1.3% higher than current figures suggest.

If all government initiatives doubled housebuilding next year (which is highly unlikely). It would be to boost GDP by a little over 1%. A similar result would be achieved with a 20% rise in output - again unlikely - for construction as a whole.

The point is not to knock initiatives to boost construction and housebuilding. I hope they work. But recoveries have to be rounded. They cannot rely on one sector.

If more housebuilding encourages consumers to spend more, over and above the multiplier effects of additional construction employment, then good. The 1930s, as well as a housebuilding boom, was the age of the consumer, with cars, electrical products, confectionary and cosmetics contributing to a sustained spending upturn.

If the promise of more airport capacity, however distant, persuades businesses that this is a time to invest, then good too.

And if. perhaps above all, the international environment improves, it is possible the government’s flurry of announcements will not fall on stony ground.

One discovery in recent years is that policymakers in Britain are powerless in the face of global events. We like to maintain the fiction that everything is the result of decisions by the chancellor or the Bank of England’s monetary policy committee.

As far as the short-term outlook for Britain’s economy is concerned, though, the big announcement was not from Cameron or George Osborne but Mario Draghi, president of the European Central Bank.

Many are concerned about his pledge of “unlimited” bond buying of eurozone countries’ debt under the new outright monetary transactions(OMT) programme. But if it boosts a shrinking eurozone economy and stabilises volatile markets, most will have reason to be grateful. The eurozone crisis has cast a long shadow. Anything that lets in a bit of sun will be welcomed.