The Afrimat Construction Index (ACI), a composite index of the level of activity within the building and construction sectors, declined by 2.9% in the fourth quarter of 2019.

The trend of the ACI, as measured by the four-quarter moving average, is now at its lowest level since early 2013.

“It is clear that a combination of high interest rates, uncertainty over land reform, inefficiencies within the public sector at large, and lethargic overall economic growth continue to place the construction sector under pressure,” says economist Dr Roelof Botha, who compiles the ACI on behalf of JSE-listed Afrimat.

Viewed from the perspective of the base year for the ACI – 2011– the ACI has increased by an average yearly rate of 1.6% (in real terms), which is only marginally less than the average yearly increase of 1.8% in South Africa’s real gross domestic product over this period.

According to Botha, it is clear that the construction sector is underperforming, which should be ringing alarm bells for government, given the urgent need to expand the country’s infrastructure, especially in the areas of electricity, housing, transport and water.

He says a particular area of concern is the decline of almost 7% in the year-on-year ACI level (from 121.9 to 114.3) and the continued weakness in both the volume and sales value of building materials produced.

“Although the latter two indicators don’t fully reflect the utilisation of building materials used in the informal sector, they mirror the downward trend in the value of building plans passed by the larger municipalities in the country.

“The latter was the worst-performing indicator included in the index and declined by more than 13% quarter-on-quarter in the fourth quarter of 2019.”

However, data released early in March by Statistics South Africa confirmed a small increase in formal employment levels within the construction sector.

The ACI was also buoyed somewhat by the traditional increase in salaries and wages during the fourth quarter, mainly as a result of overtime and bonuses paid in December.

The performance of retail trade sales for the hardware sector was also encouraging. This indicator increased by almost 9% in the fourth quarter.

According to Botha, the economy as a whole and construction activity in particular remain in desperate need of meaningful interest rate relief, to lower the cost of fixed capital formation and stimulate growth and employment creation.

“High interest rates act as a disincentive for venture capital and fixed capital formation. Since the beginning of 2017, when the scope of State capture and corruption within municipalities and State-owned companies (SOCs) became evident, construction activity has been in a slump – in real terms – which represents one of the major reasons for the increase in the country’s unemployment rate.”

Botha is, nevertheless, confident that the 2020 State of the Nation Address (SoNA) and National Budget have paved the way for a modest increase in construction activity during this year, adding that this could gain considerable momentum in 2021.

He noted several examples as signs of hope for the construction sector. This includes a plan proposed by Consulting Engineers South Africa to inject private engineering skills and expertise into relevant public sector departments and agencies.

Moreover, he says the SoNA was unequivocal in committing government to an increase in infrastructure spending, especially with regard to water provision, roads and expanding renewable energy power generation.

Also, a key future element of fast-tracking infrastructure spending would be the work of the implementation team of the Infrastructure Fund, which had finalised a list of so-called “shovel-ready projects” in student accommodation, social housing, water, rail freight branch lines, embedded electricity generation and municipal bulk infrastructure.

Lastly, according to the National Treasury, public sector infrastructure spending over the medium-term expenditure framework period is estimated at R815-billion. It is anticipated that public sector infrastructure spending will continue to increase at double-digit rates over the medium term, mainly owing to higher estimated spending by SOCs.