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Construction index improves in Q4, but 2018 average is below year before

A recovery in the 2018 fourth-quarter Afrimat Construction Index (ACI) has failed to lift the index to a higher level than the year before, but economist Dr Roelof Botha is optimistic that construction sector activity could improve in 2019.The ACI, which Botha compiles on behalf of JSE-listed Afrimat, shows that the average value of the index in 2018 was 4.7% lower than in 2017, and highlights that the South African construction sector has been underperforming since the end of the recession in 2009.

 “When compared to the same quarter a year ago, five of the eight constituent indicators remained in the red, with substantial declines in the value of building plans passed and completed, as well as the volume of building materials produced,” Botha says.Despite the real gross domestic product having increased by 1.1% during the fourth quarter of 2018 on a year-on-year basis, the value added by the construction sector declined by the same margin during this period, which Botha says is “a clear indication of the stressful conditions being experienced by the sector”.However, he states that it is encouraging to note that the index level has risen for the third consecutive quarter, following a below-par performance in 2017 and a fairly sharp deterioration in the first quarter of 2018.The index recorded a gain of 3.9% in the fourth quarter, and is now 14.4% higher than during the first quarter of 2018.

“This reflects a continuation of a broad-based recovery of the level of activity in the sector since the beginning of 2018, with five of the eight constituent indicators recording gains over the third quarter.”The best performers during the fourth quarter of 2018 were salaries and wages in the sector, the value of hardware retail sales and building material sales.According to Botha, the factors contributing to the persistence of a declining trend in the fourth-quarter average index value include the higher base value that existed in 2017, combined with the sharp decline of the first quarter of 2018, lethargic economic growth and high interest rates.

Policy uncertainty, especially regarding the possibility of land expropriation without compensation, and continued declines in capital formation for the key asset types associated with construction activity, also continue to impact on the index.Botha has expressed concern about capital formation in residential buildings and non-residential buildings, which was 5.5% lower in the third quarter of 2018 than the same quarter two years earlier, while capital formation in construction works declined by 7% over this period.

Looking ahead, he believes, however, that construction sector activity may improve during the second half of 2019, especially as a result of the new approach towards economic policy, in general, that has characterised the early stages of President Cyril Ramaphosa’s tenure.“In a significant departure from the national Budget speeches during the Zuma-era, Finance Minister Tito Mboweni made it very clear on February 20, that higher economic growth will be the government’s overriding priority in coming years – a sentiment also proclaimed during the State of the Nation Address (SONA), earlier in February,” says Botha.He points out that a number of measures were announced during the SONA and the national Budget speech to strengthen public sector corporate governance and market-friendly policies, which have already delivered dividends to the country, most notably in the form of a lower yield on the ten-year government bond and an upgrading of the outlook for State-owned Eskom’s debt by ratings agency Standard & Poor’s.

“From a construction perspective, the 2019 budget has provided hope that public sector spending on infrastructure could start improving soon, with the Finance Minister promising to develop a clear strategy aimed at improving the rate of infrastructure expansion, including a sensible project pipeline and streamlining regulations to make it easier to actually start building,” Botha highlights.Afrimat CEO Andries van Heerden comments that the anticipated upswing in activity in the sector is welcome, but notes that the group has diversified significantly over the past few years to take advantage of opportunities elsewhere, such as in iron-ore.“We remain cautiously optimistic that the outlook for construction and aggregate materials will improve, but have always followed the mantra of positioning ourselves correctly on superior product quality, price and service delivery, which, along with our highly entrepreneurial culture and positive attitude, has ensured Afrimat continues to deliver a decent return for our shareholders, no matter the circumstances,” concludes Van Heerden. 

http://www.engineeringnews.co.za/article/construction-index-improves-in-q4-but-2018-average-is-below-year-before-2019-03-11/rep_id:4136


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