The Afrimat Construction Index (ACI) for the fourth quarter of 2020 has continued on a “pronounced recovery path that started in the previous quarter”.

Owing to the lockdown regulations induced by the Covid-19 pandemic, the ACI dropped sharply in the second quarter of 2020, but has bounced back and has remained above the base period level of 100 for two successive quarters now,” says economist Dr Roelof Botha on behalf of JSE-listed Afrimat.

He explains that, in line with a number of other key indicators, the construction sector is exhibiting a return to pre-pandemic levels of economic activity. The extent and speed of recovery of the South African economy caught many economists by surprise, including those at the National Treasury, whose revenue forecasts in the October 2020 mini-Budget were blown away by a taxation windfall of R92-billion.

Between October and December last year, the quarter-on-quarter change in the ACI amounted to a satisfactory increase of 2.5%, slightly lower than the comparable figure of 3.8% for the gross domestic product (GDP).

Compared with the fourth quarter of 2019, the ACI is down by 4.4%, which is close to the year-on-year decline in the GDP of 4.1%.

The ACI recorded an index value of 111.3 in the fourth quarter, 60% higher than the index value during the “disastrous” second quarter of 2020.

“The index is now virtually on the same level as it was at the beginning of 2018, and it’s particularly encouraging that two-thirds of the ACI’s constituent indicators recorded positive growth in the fourth quarter compared with the preceding quarter,” adds Botha.

He further notes that the early start to the summer holiday season in December 2020 prevented an even stronger recovery of construction activity, with the ACI’s key subindices for building material sales and volume of production both recording quarter-on-quarter contractions during the fourth quarter.

“The systematic lifting of most of the lockdown regulations has clearly resulted in a V-shaped recovery for most sectors of the economy, including construction, and it seems clear that retail sales for hardware and building materials, and the value of building plans passed, and of buildings completed, are fuelling the latest recovery phase in the construction sector,” Botha explains.

However, he is confident that a further recovery of the sector is on the cards this year, as several growth drivers have appeared that promise to boost construction activity.

These growth drivers include that inflation is likely to remain well within the South African Reserve Bank’s target range of 3% to 6%, which means that interest rates could remain at their current low levels. The decline of 30% in the cost of mortgage financing (at the prime rate) has already aided a sharp increase in the value of new mortgage loans, Botha notes.

Following the taxation revenue windfall that occurred as a result of a fast rebound of activity in most key sectors of the economy, National Treasury was in the “fortunate position” to deliver a Budget that avoided increases in the three key sources of fiscal revenue, namely personal income tax, value-added tax (VAT) and company tax, while also increasing expenditure on economic development by a significant margin.

“The fact that an austerity budget has been avoided augurs well for government’s new infrastructure drive, which represents the cornerstone of the Economic Recovery and Reconstruction Plan announced last year,” Botha explains.

The pandemic caused the worst-ever decline in South Africa’s inventory levels, namely R165-billion in 2020. This figure is more than ten times higher than in 2019, when inventories declined by R16-billion.

“Indeed, if inventories had recorded zero change between 2019 and 2020 – a realistic scenario in the absence of a so-called ‘black swan’ event – South Africa’s GDP would have increased by 1.2% in 2020, instead of decreasing by 2% in nominal terms. Herein lies a significant economic growth driver, namely the inevitability of a reversal of fortunes for inventory build-up during 2021,” Botha further states.

Additionally, the Absa Purchasing Managers’ Index (PMI) for the manufacturing sector recently recovered to reach its highest level in two decades and has been above the neutral 50-mark level for six successive months. The Absa PMI is compiled by the Bureau for Economic Research (BER) at Stellenbosch University.

Botha also points out that several economists expect GDP growth of above 4% this year, which could provide the momentum required for sustained growth from 2022 onwards.

Afrimat CEO Andries van Heerden, meanwhile, says the continued improvement in the ACI is “a very welcome sign of some recovery in the South Africa construction sector and Afrimat is similarly experiencing this positive momentum”.

He adds that “Afrimat is in a good position to counter the effects of the pandemic by way of our diversification and with a very strong balance sheet, having close to zero debt”.

Aside from this, the company is implementing proactive measures to manage and minimise the impact of the pandemic, remaining ever mindful of its employees and stakeholder’s safety.

“As a result, I believe we are now in a better position than ever to fully benefit from the ongoing recovery in the market, given the group’s diversification,” Van Heerden comments.