Afrimat Construction Index declines in Q1’24

The first quarter of 2024 has seen a marginal decline in the Afrimat Construction Index (ACI), dropping to 1037 from 1173 in the previous quarter. This decline, according to the report, can be attributed to various factors such as high interest rates, dysfunctional municipalities, fiscal constraints, and seasonal slowdowns in construction activity. Despite these challenges, there are prospects for improvement on the horizon if the South African Reserve Bank (SARB) reduces interest rates and political stability is maintained post-elections. The latest report on the ACI indicates that 8 out of the 10 indicators showed a decline, highlighting the tough environment that the construction sector is currently facing in South Africa. However, amidst the gloom, there was a notable increase in wholesale sales for construction materials, which saw a 10% year-on-year rise in real sales values. This positive trend in wholesale sales may be attributed to anticipation and the informal sector construction companies buying directly from wholesalers. Dr. Roelof Botha, Economic Adviser at Optimum Investment Group, noted that the first quarter is typically challenging for the construction industry due to seasonal factors such as extended summer holidays, preparation for Easter holidays, and the recent elections. The elections, which saw a low voter turnout of 58%, have now paved the way for a Government of National Unity that supports key principles like private property rights and free enterprise. However, not all news was positive, as the report also highlighted significant declines in the value of buildings completed and new building plans passed at municipal levels. Dr. Botha pointed out that one of the major obstacles to growth is the high interest rates in South Africa. Homeowners are currently paying significantly more due to elevated interest rates, despite the absence of demand inflation. He stressed the need for lower interest rates, job creation, and higher growth to stimulate the economy. The issue of dysfunctional municipalities was also a key focus of the discussion, with Dr. Botha emphasizing the need for a forensic investigation into the managerial capabilities of municipal executives. He suggested that bringing in expertise from well-functioning municipalities, such as those in the Western Cape, could help address the infrastructure challenges faced by many municipalities in the country. Looking ahead, Dr. Botha expressed optimism for the construction sector, especially if the SARB decides to reduce interest rates. He criticized the current real interest rate of 6.5% in South Africa, which is much higher compared to other countries like the United States. He outlined that aligning the real interest rate with inflation targets could unlock significant potential for growth and investment in the construction industry. In conclusion, the challenges facing the construction sector in South Africa are significant, but there is hope on the horizon. By addressing issues such as high interest rates, dysfunctional municipalities, and infrastructure constraints, the sector could experience a much-needed revival. The upcoming decisions around interest rates and political stability post-elections will play a crucial role in determining the future trajectory of the construction industry in the country.