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Afrimat Construction Index reflects 3% y/y real growth in Q4 2023

Despite the lethargy of the economy in Q4 2023, the latest Afrimat Construction Index (ACI) outperformed the economy with a 3% real growth rate, compared to real GDP growth of 1.2%, mainly due to strong performances from employment, wholesale sales, and construction materials.

The ACI is a composite index of the level of activity within the building and construction sectors compiled by economist Dr Roelof Botha on behalf of Afrimat.

Dr Botha says that the year-on-year basis expansion of the ACI is encouraging, especially against the background of the high cost of capital in South Africa, adding that job creation expanded in 2023 with 110 000 new jobs created, compared to 31 000 in 2022.

The index recorded a level of 118.9 in Q4 2023 compared to 120.3 in the previous quarter, and 116 in the second quarter. “Significantly, the latest four-quarter average reading of the ACI – which eliminates seasonal influences – has risen further and is close to the same level as before COVID-19, which means that construction activity has more or less fully recovered from the negative impact of the lockdowns and recession that accompanied the pandemic.”

Botha points out that the index values for Q4 2023 are not strictly comparable to the previous quarter due to the broadening of the base of constituent indicators to include the real value of construction works, a component of gross fixed capital formation in the economy.

Also encouraging is the quarter-on-quarter increase of 9% in the value of new buildings completed, albeit from a low base. It remains concerning, however, that the real value of construction works remains lower than in the fourth quarter of 2019, i.e., pre-COVID-19. This indicator is under pressure from a combination of fiscal constraints, dysfunctional municipalities, and restrictive monetary policy,” he says.

The two indicators in the ACI that continue to fare very poorly are the “Value of Building Plans Passed” and “Buildings Completed at Larger Municipalities”. Botha explains that these data sets are aligned with the continued decline in the number of mortgage bond applications administered by BetterBond and a hefty increase in the average deposit required for a home loan. In 2019, first-time homeowners required a deposit of around R60 000, on average, to access a mortgage loan. “This has now shot up to just below R250 000, which acts as a significant deterrent to residential property market activity.”

According to Botha, several key drivers have come to the fore that may lead to an expansion of construction activity in 2024 and beyond, including further progress with the switch to renewable energy; visible signs of closer cooperation between the private sector and government agencies in the maintenance, repair, and expansion of SA’s logistics infrastructure and the consistent decline in the CPI and PPI, which should lead to a series of interest rate declines in 2024.