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Construction activity and confidence levels wane

Combination of factors to blame.
The prevalence of intimidation, extortion and violence on construction sites – which has reached ‘crisis levels’ – isn’t helping. Image: Supplied

Activity levels and confidence in South Africa’s construction sector are declining again after rebounding strongly from the negative impact of the Covid-19 lockdowns.

Construction activity, as measured by the Afrimat Construction Index (ACI) released on Thursday, declined 3.5% in the first quarter of 2022. The index is a composite of the level of activity within the building and construction sectors.

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Roelof Botha, who compiles the index and is the economic advisor to the Optimum Investment Group, said ever since the index recorded its highest level yet of 143.8 index points 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.

Confidence in the building and construction industry is as erratic.

The latest FNB/Bureau for Economic Research (BER) Building Confidence Index report released this week revealed a six point decline in the index to 34 on a 100-point scale in the second quarter of 2022. This index improved significantly to 33 index points in the fourth quarter of 2021 from only seven in the third quarter and subsequently improved further before confidence waned again.

Higher ‘main contractor confidence’ 

FNB senior economist Siphamandla Mkhwanazi said main contractor confidence rose to a more than five-year high of 46 in the second quarter of 2022, with this improvement supported by higher activity, particularly in the residential sector.

Mkhwanazi admitted the extent of the improvement in residential building activity was surprising given the deterioration in the broader macroeconomic environment over the past few months.

However, he said a number of specific factors likely played a role, including work relating to the conversion of office space to residential space and rebuilding efforts following various disruptions, particularly in KwaZulu-Natal.

Read: Africrest Properties pumps R800m into Sunninghill office-to-residential conversions

FNB/BER reported that sentiment in the building material manufacturing sector fell by 43 points, weighing on overall confidence.

Weak order books

Mkhwanazi said the growth momentum in building activity registered in the second quarter may not be sustained, given still weak order books and uncertainty regarding whether projects at the start of the building pipeline will translate into realised building work.

He added that it is encouraging that building activity, especially in the residential sector, rose noticeably in the second quarter of 2022.

“However, there are two caveats. The first is that this comes off a low base. The second is that there is little indication, both from builders and from architects, that this will continue in coming quarters, at least not at the same pace,” he said.

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Meanwhile, Botha said although the ACI managed to marginally outperform the gross domestic product (GDP) growth rate during the first quarter of 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.

Botha attributed this trend largely to construction contracts stipulating the completion date of a project, in addition to 16 December being the end of the construction season each year and when many incentives are paid to workers.

He said hardware sales also always peak in the fourth quarter every year while the first quarter is “always lousy”.

Botha attributed this to January being an unproductive month because a lot of people are still on leave, February being the shortest month of the year and March having a few public holidays.

Construction and building materials sales up

The only sub-indicator of the index that recorded positive growth between the fourth quarter of last year and the first quarter of 2022 was the value of wholesale sales of construction and building materials.

Botha said contractors were obviously preparing for more activity based on the government-promised infrastructure expenditure programme, and hardware retailers placed a lot of order to restock after a busy December.

Read:
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The worst performing sub-indicator was labour remuneration, which declined by more than 15% between the fourth quarter of 2021 and the first quarter of 2022.

Employment in construction declined by 0.6% in the first quarter of 2022 compared to the previous quarter, while construction salaries and wages declined by 5.1%.

Botha said this decline started in the first quarter of 2019, the last quarter before the Covid-19 lockdowns.

“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.

“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,” added Botha.

He said that 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.

He said the industry is also having to cope with higher interest rates while 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.

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Apologies for the repeat but the equation remains solid and proven, construction industry health = leading political party health, so much so on this continent.

End of comments.

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