Construction activity returns to growth mode

Despite disappointing 3rd quarter GDP data, South Africa’s construction sector seems to have turned the corner and is heading for expansion in 2024.

Afrimat, a JSE-listed company, has just released the findings of the Afrimat Construction Index (ACI) for the 3rd quarter of 2023. The ACI is a composite index of the level of activity within the building and construction sectors and it has enjoyed a stellar three months between July and September.

The quarter-on-quarter increase in the ACI of 9.2% stands in sharp contrast to the marginal decline in the country’s GDP and builds on the positive ACI growth rate of 5.8% recorded in the 2nd quarter of the year. The latest index level is the highest since the 4th quarter of 2016 and, if the current momentum can be maintained in the 4th quarter, may herald a new, sustained growth phase in the construction sector.

It is especially encouraging that the important indicator of job creation in construction continued to record a healthy growth rate, with 145,000 new jobs having been created since the beginning of 2023. Equally impressive is the increase of almost 10% in the volume of building materials produced in the 3rd quarter, compared to the previous quarter, with year-on-year growth also having returned to growth.

The only two indicators in the ACI that fared poorly were the value of building plans passed and buildings completed at the larger municipalities. These data sets are aligned to a sharp decline in the number of mortgage bond applications administered by BetterBond and a hefty increase in the average deposit required for a home loan and are the result of two years of restrictive monetary policy, which has led to the highest interest rates in more than a decade.

Despite the slump in the residential housing market, several key drivers of further growth in the construction sector may strengthen or emerge during 2024. They include the following:

• Progress with public/private partnerships or outright privatisation in repairing, maintaining, and expanding the country’s logistics infrastructure

• Progress with the inevitable and gradual switch to renewable energy, which is often linked to construction activities

• New capital formation in the economy, which recorded its 7th successive double-digit growth rate during the 3rd quarter of 2023 (year-on-year)

• Closer cooperation between the SA Police Services and contractors to prevent undue criminal activity at building sites, including adequate fiscal support

• A larger measure of price stability in the economy, which may lead to lower interest rates, hopefully early in 2024.

In addition to the sterling performance of wholesale sales of construction materials, new job creation, and the volume of building materials, other highlights were the positive real growth in the value of building material sales, retail hardware sales and remuneration of construction workers (quarter-on-quarter).

The positive trend in construction activity seems to have been influenced by the increase in the public sector’s spending on capital formation, which will hopefully continue and gather momentum over the next couple of years, as the damage done to the country’s infrastructure by state capture is addressed.