News Research

Construction sector activity hit hard by repo rate increases since 2021

The poor performance of the economy over the past two quarters is evident in construction sector activity with the Afrimat Construction Index (ACI) declining by 8.6% compared to marginal growth in real GDP of 0.4% quarter-on-quarter.

According to economist Dr Roelof Botha, who compiles the index on behalf of Afrimat, the year-on-year decline in the ACI was more muted with the ACI declining by 3.4%, compared to GDP growth of 0.2%.

A highlight of the first quarter reading was the consolidation of growth for valued added by the construction sector with real expansion recorded on both a quarter-on-quarter and year-on-year basis.

Compared to Q1 2022 i.e., year-on-year, the outstanding performances were the increases of almost 12% in construction sector employment and more than 4% in value added by the sector. Two other indicators also recorded positive growth rates, namely retail trade sales for hardware and sales of building materials.

It is evident that the results of the ACI in the first quarter compared to the fourth quarter of 2022 were mainly influenced by sharp declines in the values of building plans passed and buildings completed in the larger municipalities of South Africa,” comments Dr Botha.

The highest interest rates in fifteen years have served to dampen the demand for new houses, as also illustrated by the sharp decline in the number of mortgage bond applications administered by BetterBond. Due to the pervasive negative influence of higher interest rates on most of the economy’s demand components (via raising the cost of capital and credit), a host of economic indicators started reversing the recovery trend from the pandemic.

According to Dr Botha, construction sector activity has been hit hard by the increases in the Reserve Bank’s repo rate since the end of 2021. “The Monetary Policy Committee of the Reserve Bank seems to have overplayed its hand in continuing to raise the official bank rate against the background of a pronounced drop in consumer and producer price indices.”

On a positive note, he is confident that the rate hiking cycle is nearing its end, with both the producer price index (PPI) and the consumer price index (CPI) having peaked and beginning to enter a downward trajectory. “The PPI has dropped from a high of 18% in July last year to 8.6% in April 2023, a decline of 52%, whilst the CPI is down from a peak of 7.8% to 6.8% currently, a drop of 12.8%.”

Another positive development is the increase in the ratio of capital formation to GDP by both the private and public sectors during the first quarter of 2023. “Although the current combined level of 15.1% remains well below the average for emerging markets, the upward trend is encouraging.”

More good news is the fact that the Government has effectively admitted its negligence in the areas of maintaining and expanding the country’s infrastructure by creating two Crisis Committees to deal with these challenges.

CEOs from some of SA’s largest companies have also agreed to lead work streams set up to support Government in tackling the country’s prevailing crises in the energy and transport sectors, as well as debilitating levels of crime and corruption. Following a meeting between organised business and government on the 6th of June 2023, an agreement was reached to form a partnership to tackle the three issues, which have emerged as major obstacles to growth, development, and job creation. Key to this new initiative is the undertaking by business leaders to collaborate with the National Energy Crisis Committee (Necom) and the National Logistics Crisis Committee.

Hopefully, a much greater emphasis on private sector involvement in the planning and execution of infrastructure maintenance and development will eventually pave the way for a revival of construction sector activity in South Africa,” he says.