The decline in construction between the first and the second quarters of 2014 was 16.2% or 50.7% on a seasonally and annualized basis respectively. This in itself was the biggest decline since April 2010 and again shows how fragile South African consumers and business confidence are at present. This again is a massive response to uncertainty in the South African economy.
With furniture sales in decline, as well as car sales and now buildings and the construction of new buildings in particular, we can see that the durable sector in South Africa is under severe pressure. This certainly means that a lack of long-term confidence has hit the economy hard.
Where does this sudden fall come from?
It is difficult to say where this pressure comes from as there is not a single source. Certainly the longest strike in South Africa’s history (the platinum strike) had a huge role to play in the declining confidence within the construction and durable goods sector.
Strikes are certainly not the only negative factor in our economy but certainly one of the more difficult ones to measure, in a sense of the influence they have on the actual economy.
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The weakening rand has also led to higher inflation which in itself has led to a 75 basis point rise in interest rates, which means that the cost of borrowing has increased slightly. While this on its own would not have led to as big a decline in the construction sector, it certainly added to the stresses of the sector.
South Africa needs to take a long hard look at itself and look beyond the usual suspects such as the higher interest rate, inflation and government deficits and also look at the structural issues that are hampering their economy.
Infrastructure
South Africa’s infrastructure is not sufficient as we need more roads, water plans, transport and electricity. We also need this to improve people’s long-term view of the stability of the South African economy.
This view on stability is what creates certainty or uncertainty in the market for durable goods as people usually take a long-term view when buying assets such as property and cars.
The infrastructure constraints, along with industrial relations that have severely soured over the last three or four years, are two new problems that the South African economy has been facing over the last two decades. Another risk is that South African companies see more rewards from investments outside South Africa’s borders.
Everyone is talking about Africa these days and the fact that sub-Saharan Africa is the second fastest growing region in the world. The mere fact that South Africa is not growing as quickly as our neighbours poses a risk to the construction sector, as well as the broader infrastructure sector. Buying a truck or building an office park may make more sense in another country that is growing faster than South Africa.
The overall return on investment in South Africa has not been as unfavourable since the great recession of 2008/09, as the profitability of mines and other primary sectors declined significantly, along with many other sectors in our economy. The fact that the primary sectors have seen a decline in their gross operating margin resulted in reduced spending elsewhere in the economy.
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For the first six months of 2014 construction has declined by 10.2% compared with the first six months of 2013. This decline of over R2.5 billion shows that the construction industry is probably just keeping the wolf from the door. Even more frightening is the fact that R3.5 billion was the decline between the first six months of 2012 and 2013 in real terms. This is the fastest decline in the South African construction industry since 2011 and because it comes on top of so many declines since the recession it is difficult to see how the sector is going to make a turnaround in the short term.
So what happens now?
On normal projections one would have expected about an 8% increase in 2014 compared with 2013 had it not been for the capacity constraints and the strikes. It is clear that 2014 is going to be a dismal year for the construction industry and probably the worst year since the great recession, unless a major boost of confidence takes place in the short-term.
At the moment it does seem that there are no more major strikes on the horizon in 2014, but there remains some concern about the public sector wage negotiations and what that might mean for strikes in 2015.
2015 does not look that positive as interest rates are likely to rise again before the end of the year.
One does not want to make too many negative predictions but at the moment one can only expect a small improvement in the construction industry next year. I think it is very unlikely that we will see a significant turnaround over the next six to nine months.
Mike Schussler is a leading South African economist with over two decades of experience; he is the founder and owner of http://www.economists.co.za/
