Construction activity rebound expected in third quarter
After dropping to a record low.
Activity levels in the building and construction sectors are expected to improve dramatically in the third quarter of 2020 following the lifting of Covid-19 lockdown restrictions after unsurprisingly plunging to a second consecutive record low in the second quarter.
The Afrimat Construction Index (ACI) slumped below 100 for the first time to 97 in the first quarter and nosedived to 65 in the second.
The ACI, compiled by economist Roelof Botha on behalf of Afrimat, is a composite index of the level of activity within the building and construction sectors.
Botha stressed on Thursday that the ACI’s trend for the second quarter is abnormal and should not be mistaken for a likely future trend.
“The fact that construction activity declined as dramatically as it did is not only related to the stringent lockdown regulations but also to the small size of the sector’s direct contribution to GDP, which is currently only 3%,” he said.
“However, the construction sector is a crucial enabler of downstream economic activity, especially as it pertains to capital formation. This is one of the reasons infrastructure development has been identified by the government as a key priority for the economic recovery plans.”
Botha agreed that it will be easier for the construction sector from a statistical viewpoint to recover strongly in the third quarter because activity levels have fallen so low.
He is adamant that every single ACI indicator will improve in the third quarter and move back up above 100, the base period for the index.
However, Botha said it remains to be seen if construction and building sector activity levels match those of the third quarter of 2019.
“This is a volatility correction improvement that will occur,” he said.
“A structural increase will only follow after lower interest rates and government’s strategic infrastructure projects programme have gained some momentum and people realise they have a lot more money to build a house at current interest rates than they used to.”
Recovery hopes have a tangible driver
Botha said government’s infrastructure investment drive is arguably the most important tangible driver of recovery in construction.
This is a reference to President Cyril Ramaphosa’s confirmation at the Sustainable Infrastructure Development Symposium in June that government has placed infrastructure at the centre of the stimulus the economy needs to achieve a sustainable recovery.
This was followed by government in July unveiling 50 strategic infrastructure projects (SIPs) and 12 special projects involving a total investment of R340 billion as the first tranche of a massive infrastructure expenditure programme to drive the post Covid-19 economic recovery effort.
The initial SIP projects are expected to create an estimated 275 700 jobs in six sectors: water and sanitation, energy, transport, digital infrastructure, agriculture and agro-processing, and human settlements.
Botha said these projects have been declared strategically important and will be fast-tracked to secure the necessary approvals, including municipal rezoning and water rights, by the end of September.
In addition, these projects have the necessary sovereign guarantees – and approvals for increased borrowing have already been secured, while funding has been agreed with private sector banks and development organisations, he said.
“The beauty of the SIP [programme] is that it has very little to do with Finance Minister Tito Mboweni’s medium term budget because the bulk of that financing falls outside the national budget,” he said.
Botha said work on the projects should start before the end of October, or at the very least tenders should have been issued in this time.
He said the priority being assigned to these projects is directly related to the urgent need for employment creation and economic revival following the havoc caused by the coronavirus crisis.
“Construction is the most labour-intensive sector in the economy and the high priority that has been assigned to affordable housing projects has the potential to re-energise a pervasive supply chain that is not reliant on imports, with value being added by domestic businesses,” he said.
Possible problem …
Botha warned that dysfunctional municipalities need to be resuscitated “very quickly”.
“There are all kinds of things that the municipality must approve. They are part of the equation and if the municipality is either dysfunctional or bankrupt or incompetent or a combination of those, then you have a huge obstacle,” he said.
David Metelerkamp, senior economist at construction market intelligence firm Industry Insight, said the outlook for the civil industry largely hinges on the efficacy of the government’s stimulus efforts, adding that Industry Insight remains sceptical about this.
Metelerkamp said the outlook for the building industry remains bleak, with the worst economic crisis since the late 1920s hammering private sector demand for housing as well as commercial and industrial space.
However, Botha believes the lower interest rates will be a huge incentive for building activity, adding that many people will be spending money to transform a part of their house into a home office because they have been working from home since the initial Covid-19 lockdown.
Botha highlighted that hardware sales in June were 4% higher than in June 2019.
Common sense indicator
“These small do-it-yourself guys are having a field day and add to that the 51 SIP mega projects, then my common sense tells me that construction is on the way up and looking good in future,” he said.
Botha said it was predictable that the ACI would drop to well below the level of 100 due to the lockdown regulations imposed between April and June.
He said the construction sector temporarily almost ground to a halt during the lockdown, with April recording insignificant levels of activity for every key indicator relevant to construction.
Botha said construction activity in South Africa followed the sharp downward trend of virtually every other sector – but that the GDP figures for the second quarter released by Statistics SA this week indicated that construction fared the worst of any sector, declining by more than 30% compared to the same quarter in 2019.
For the economy as a whole, the nominal decline in GDP amounted to 14.8% year on year.
Botha attributed the severe impact on the sector to several factors, including the very strict lockdown regulations and the fact that the construction sector is very reliant – and much more so than other sectors – on approvals from various public sector agencies, especially municipalities.
The value of building plans passed dropped by 73.1% in the second quarter compared to the same quarter of 2019 while the value of buildings completed plunged by 90.5% in the same period.
Botha attributed this to workers being loath to return to work because of fears about Covid-19 and the fact municipalities, unlike the private sector, did not apply the ‘no work, no pay’ principle during lockdown.
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