Construction sector outlook: Finding a place in an economic downturn

Kavena Ramsoobhag, MSc. Economics
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The global economic downturn has now engulfed the nations of the Caribbean and has reached the shores of the booming economy of Trinidad & Tobago. This resourced based twin island has come a long way from the 1980’s and today stands in a much better position than many of its CARICOM counterparts in withstanding the global economic slowdown. The sovereign was  given an A- rating from international rating houses, such as Moodys’, based on several factors, which included strong growth in its foreign exchange reserves, reduction in the unemployment rate, comparatively low debt ratios and is currently holding on to the position as a net external creditor. The economy has shown strong growth patterns over the period 2002-2007, growing on average of 9%. The construction sector is one of the many sectors that has benefitted significantly from this expansion.

The construction sector has grown an average of 10% over a five (5) year period, 2002- 2007, and has increasingly contributed to the growth in the Gross Domestic Product (GDP) of the economy. In percentage terms, this industry contributed 9.4% to GDP in 2007; up from 7.1% in 2004. This comes as no surprise as the main driver of the sector has had its feet on the accelerator moving full speed ahead to attaining a ‘developed’ nation status by the year 2020.  In recent years, whilst facing supply-side constraints, the construction industry has been one of the main driving forces in the expansion of the non-energy sector. This sector has accounted for 5.2% of the growth within the non-energy sector in 2007; up from 4.2% in 2006.

Employment within this sector has been on a steady decline since 2004, declining to 9.2% in 2007 from 10.5% in 2004. One proposes that a reduction in employment within this sector would have been a result of the reduction in the supply of skilled workers coupled with rising labour costs within the industry. The Central Bank of Trinidad & Tobago noted in its Annual Economic Survey 2007, that a shortage of skilled workers exists within this sector. The government of Trinidad and Tobago has attempted to address this scenario with its many training programmes offered by agencies such as the National Training Agency (NTA). However, as the economy begins to feel the effects of the slowing global growth, the government has now decided to decrease its speed towards infrastructural development. The recent reduction in the proposed government expenditure for fiscal year 2008/9, in large part, affects the construction industry. These cutbacks have been geared towards a reduction in the construction of various infrastructures such as housing, schools and hospitals. Amidst calls from the Prime Minister to “tighten our belts” one must then ask the question, “Can the construction sector survive a belt tightening?”

The answer to this question depends a great deal on the ability of the construction industry to increase its productivity, the skills of their workers and their ability to access relatively cheaper cost of funding from international creditors. In recent times, the construction sector has been forced to rely on international workers, many of whom are from the Asian continent and Latin America, to satisfy their need for skilled workers. The Asian workers are known for their unique mindset to increasing productivity and efficiency with a seemingly genuine pride for the products/services that they provide at the lowest cost (cost efficiency). Therein, lies very important lessons for all parties within the local construction industry. An understanding between all parties that increased cost efficiencies from the local contractors, lowered wastage, and an increase in the number of productive hours by workers may reduce the expenditure of the public sector. This, in turn, may result in a steady flow of revenues during this period of slow growth.

The planned expenditure for the continued expansion of the energy sector has been left untouched in the recent government expenditure cutback. This unaffected expenditure translates into a continued demand for skilled construction workers within this sub sector (those construction workers who apply their skills to the construction of plants within the energy sector) of the construction industry. The construction company that can quickly adapt its capital equipment and labour to fill this need should be able to maintain a steady flow of revenues during the slowdown. One suggests that for the companies who are unable to access credit readily in the local market, a look towards low cost credit facilities within the North American market would be beneficial. The US Federal Reserve has recently reduced their federal funds rate to a target range between 0 – 0.25%.

The construction sector has contributed to the overall growth of the economy and with the willingness to adapt to the changing economic environment one believes that the construction sector can find a place within the local economic slowdown. However, this is dependent on the willingness of all parties within the sector to commit to increasing cost efficiencies, lowering the wastages of raw materials, increasing the number of productive hours on the job and the ability to adapt itself to meet the needs of the various sectors within the economy. In essence, for the construction sector to rise above the downturn, a ‘tightening of the industry’s belt’ is not just an option but a necessity.