News Research

Low economic growth and high levels of violent crime dampen construction sector activity

The lifting of lockdown regulations resulted in a V-shaped recovery for most key sectors of the economy during the second half of 2020, including construction. Since then, several sectors have fully recovered and progressed to a new phase of expansion, but construction sector activity remains subdued, according to the Afrimat Construction Index (ACI) for Q1 2022 compiled by Dr Roelof Botha.

Although the ACI managed to marginally outperform the GDP growth rate during Q1 2022 on a year-on-year basis, the index has returned to its traditional trend of recording a decline between each year’s fourth quarter and the first three months of the following year, recording a drop of 3.5% in the index value (from 118.8 to 114.7).

The only sub-indicator of the ACI that recorded positive growth between Q4 2021 and Q1 2022 was the value of wholesale sales of construction and building materials. However, compared to the first quarter of last year, the picture is considerably more positive, with four of the nine sub-indicators recording positive growth, whilst two others were virtually unchanged (declines of less than one per cent).

Ever since the ACI recorded its highest level yet, namely 143.8 during the third quarter of 2016, a combination of high interest rates, low economic growth, state capture, public sector incompetence and high levels of violent crime have dampened activity in the country’s construction sector”, says Botha.

Compared to the first quarter of 2021, the shining stars of the latest ACI were the volume of building materials produced, the values of buildings completed in the larger municipalities, and wholesale sales of construction and building materials. Since the Q4 2021 the worst performing sub-indicator was labour remuneration, which declined by more than 15%.

However laudable the policy initiatives announced in this year’s State of the Nation Address and National Budget may be, these will essentially remain only promises unless the stated government objective of closer cooperation with the private sector is translated into active public/private partnerships”, says Botha. “As long as the value of construction works represents only 4% of the country’s infrastructure project pipeline, new jobs will not be created at scale in the construction sector”.

He says one of the most serious obstacles to the further expansion of construction activity is related to the prevalence of intimidation, extortion, and violence on construction sites, which has reached crisis levels. 

The industry is also having to cope with higher interest rates. A combination of global supply-side constraints and record high levels for energy commodities, especially oil, has fuelled the highest global inflation rates in more than 50 years. “The negative impact of higher interest rates is already being felt in a decline, in real terms, of average house prices in South Africa and also in the value of building plans passed by the larger municipalities”.

One positive aspect is the fact that South Africa’s public finances are in good shape, with the public debt/GDP ratio having stabilised. Prominent international credit rating agencies have already acknowledged National Treasury’s sound management of the country’s fiscal affairs by upgrading the outlook for South Africa’s government bonds. “There is enough money in the kitty to significantly expand construction sector activity, but government’s promises of closer cooperation with the private sector needs to be fulfilled post-haste for this to become a reality”.

Note: Index value comparisons with previous editions need to take cognisance of the inclusion of an additional indicator and the re-basing of South Africa’s GDP by Statistics South Africa, affecting historical values.