Weak economic growth during the first quarter was evident in SA’s construction sector, according to the Afrimat Construction Index (ACI) Q1 2024, a compilation of the activity levels within the building and construction sectors compiled by economist Dr Roelof Botha.
The 1.3% year-on-year decline in the ACI compares to the annualized 0.5% increase in the country’s GDP, with a decline of almost 9% in the construction sector’s value-added being of concern. “On the upside, the decrease was somewhat offset by the 10.1% year-on-year increase in the value of wholesale sales of construction materials,” he notes.
Botha says that while the year-on-year increase of 14 000 jobs in the sector is encouraging, the total employment figure of just over 1.2 million is still 128 000 shy of the number of jobs that existed in Q1 2020.
The lethargy in the construction sector has been caused by a combination of factors including the high cost of capital in South Africa, with the current prime overdraft rate of 11.75% – a full 175 basis points higher than pre-Covid-19. Lending rates are at their highest level in fourteen years, despite the Consumer Price Index (CPI) having been within SARB’s target range for inflation of 3% to 6% for eleven straight months and the long-standing absence of demand inflation in the economy.
Other factors include the dozens of municipalities that have been dysfunctional for many years, preventing them from accessing conditional National Treasury grants earmarked for infrastructure upgrading as well as fiscal constraints due to weak economic growth which has prevented any significant increase in construction-related capital expenditure in the 2024/2025 National Budget.
Botha points out that construction activity is also traditionally quite subdued during the first three months of the year, due to a lengthy summer holiday period and the Easter holidays. “There may also have been a measure of hesitancy with new construction projects because of the uncertainty surrounding the elections, especially due to early indications that parties with populist agendas would garner substantial votes.”
He said that, fortunately, the two largest political parties appear to be committed to maintaining the Constitution and the principle of private property rights. “South Africa has now joined the majority of democracies where executive governance will in future be based on some form of cooperation between two or more parties – either through a coalition or a government of national unity”.
Looking ahead at the prospects for the construction sector for the rest of the year, Botha is confident that the consistent decline in the Consumer Price Index will force the SARB’s hand to lower interest rates at the July meeting of the Monetary Policy Committee, especially now that the European Central Bank has cut its key rate from 4% to 3.75%. “Significantly lower interest rates are required to incentivise capital formation and construction activity and the proverbial ball should start rolling soon.”
