State of the Construction Industry

State of the Construction Industry

Industry Insight’s Senior Economist, David Metelerkamp

At a breakfast hosted by AfriSam in Johannesburg recently, David Metelerkamp, Senior Economist at Industry Insight, delivered his analysis of the State of the Construction Industry in South Africa.

In his opening address to some 200 guests from all facets of the construction sector, trade associations, government representatives, institutions, investors, bankers, industry analysts and the media, Rob Wessels, CEO of AfriSam, stressed the need for a positive Africa vision and an integrated view by all stakeholders in mapping the way forward.

Taking the podium, David Metelerkamp outlined the global scenario and an array of factors affecting our economy, in particular the US imposition of tariffs which are having a severe negative ripple effect on the global economy.

Cautious optimism
Although there was an air of cautious optimism across the country in the first quarter of 2018, the construction sector performance has remained consistently poor; and retail too has slumped to -3.1%. Yet this remains a massive improvement to the Zuma era.

“We have past the turning point in the economy – things are looking better – but not much”

He noted that amongst the “pros” of the current state, an increase in private investment is encouraging; and that the reform of state owned enterprises (SOEs) now underway will be slow – but will ultimately be good for the construction sector. In addition, inflation is under control, and the exchange rate remains buoyant.

However the serious array of “cons” present significant hurdles to be overcome, including the land expropriation débâcle; lack of improvement in education; and the decrease in infrastructure spending from R947 billion in 2017/2018 to R841 billion for 2018/2019.

Industry Insight projects a 1.5% growth in GDP for 2018.

Metelerkamp estimates the true size of the construction sector to be in the order of R220 billion – a clear and dramatic downward trend into recessionary levels.

The demise of the traditional large contractors such as NMC, Liviero, Aveng – and more recently, Basil Read – is the result of the increasing number of smaller contractors from 17% to 40% – doubling their market share.

“But,” said Metelerkamp, “it’s not all doom and gloom. You just have different clients now as suppliers”

“Despite the worst ever confidence levels there is presently good growth of 18% in tender activity. Furthermore, postponement and cancellation of projects has dropped significantly since 2017 and in non-residential construction there is 12.4% more going to tender – especially in the health and education arena.”

Concluding his address, Metelerkamp said we are past the turning point and looking a little better, and with civils being in recessionary territory construction companies will be better off focusing on building.

 

Clear and robust downward trend in construction GDP

Elsie Snyman, CEO, Industry Insights

Clear and robust downward trend in construction GDP

The South African economy exited the technical recession, growing by 2.5 percent in the second quarter of 2017, which was much better for all sectors of the economy, except the construction sector, which was the only sector to exhibit negative GDP growth in the second quarter. This is largely in line with expectations, with Industry Insights project data, as well as the building plans data from Stats SA suggesting a more depressed outlook.

Construction GDP declined by 0.5 percent in the second quarter, marginally better than the 0.8 percent decline in the first quarter. There has been a clear and robust downward trend in the construction GDP figures over the last 8-12 quarters, with growth declining quarter by quarter, and entering negative territory this year.

The primary sector of the economy performed well in the 2nd quarter, with the agricultural sector bouncing back significantly, growing by 33.6 percent, which is the biggest quarterly change in more than 20 years. Rainfall has returned to most of the country, and record maize harvests for example, have been recorded. Unfortunately the agriculture industry only makes up between 2 and 3 percent of total GDP so was not enough to give a significant boost to the economy, contributing 0.7 percent to the 2.5 percent growth. The mining sector grew by 3.9 percent in the 2nd quarter, off a big 13.1 percent increase in the first quarter supported by an uptick in the global economy ad commodity prices, on average. The manufacturing sector grew for the first time in four quarters, following three back to back declines. The 1.5 percent growth in the 2nd quarter comes as some relief given the sheer magnitude of the sector. The electricity and water sector grew by 8.8 percent, and the construction sector as mentioned, was one of the only sectors to decline. Overall a mixed performance of the secondary sector of the economy in the 2nd quarter.

Finance, real estate and the business services sector also bounced back along with the rest of the services industry in South Africa, growing by 2.5 percent. Wholesale and retail trade, which surprised largely on the downside in the first quarter, is back into positive territory and grew by 0.6 percent. The only other category/sector to contract was general government services, which contracted by 0.6 percent, from a 0.7 percent contraction in the first quarter. Some commentators are suggesting that this may be some sort of turning point for the economy, but we would be very cautious to use such language. The South African economy is still plagued by a crisis of confidence as well as some serious structural issues which have been highlighted over the past two years. The rating agencies remain one of the main protagonists in the story, and policy uncertainty remains rife.

Source: Industry Insights