An important factor behind this broad-based weakness in manufacturing was weakness in the domestic construction sector. Construction activity contracted by 22 percent between the December quarter 2007 and the December quarter 2009, and remained low in the following years. As we saw in figure 10, construction is highly dependent upon manufactured inputs. The fall in construction activity represented a significant decline in demand for the manufacturing industry. The elasticity shown in figure 10 implies that the construction industry contraction that took place between December 2007 and June 2012 is consistent, by itself, with a cumulative 8.5 percent fall in manufacturing activity – quite close to the fall that actually occurred (figure 16). Construction activity has remained very weak following the recession in various other advanced economies, and this weakness is reflected in the manufacturing output of those countries too (the United Kingdom is an example).
It would be one thing if the recession had dampened demand for residential construction; it then would be desirable to shift resources out of manufacturing for that sector and into other areas. But that really doesn’t seem to be the problem – New Zealand property indices have housing above 2007 peak prices in Auckland and Christchurch; demand seems robust. Rather, Councils have effectively made it illegal to build new houses.
It’s also mildly amusing that some of the same folks who shout loudest about declining manufacturing are also the folks who most strongly support heavy restrictions on residential construction. The two things are kinda linked.