How a rate cut could build on sector's budding recovery



25-09-2018
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Construction activity remains constrained ‘because of high interest rates and policy uncertainty’

SA needs an interest rate cut to kick-start the economy and stimulate the constrained construction industry, says economist Roelof Botha.

Though the country recently slipped into technical recession, the construction sector has shown signs of recovery, according to the Afrimat construction and building index for the second quarter of 2018.

Speaking after the release of the index on Thursday, Botha said the recovery could accelerate with lower interest rates.

"Since the end of 2016, the consumer price index [CPI] has declined by 190 basis points.

"In that period, all we have had are two 25 basis-point cuts in interest rates.

"So we are 1.4 percentage points behind the curve. The industry and the economy need a little bit of stimulation via a rate cut," he said.

Policy uncertainty

He said it was also imperative for the country to resolve the uncertainty about land reform policy "pragmatically".

The latest Afrimat index, a composite measurement of the level of activity in the building and construction sectors, showed a recovery in activity, with the index level improving by almost 7% compared to the first quarter.

Botha compiles the index on behalf of Afrimat.

The index showed marked improvement in the construction sector, compared to the first quarter, with seven indicators showing increases on a quarter-on-quarter basis.

"It’s also encouraging that the overall index has improved by 15.1% since the first quarter of 2011, the base year, which is marginally higher than the increase in the country’s real GDP of 13.8% over this same period," Botha said.

Botha said construction activity remained constrained because of high interest rates and policy uncertainty, "especially regarding the possibility of land reform".

He said that the latter "has resulted in a drop in the value of agricultural land, while residential property values on average also declined further in real terms during 2018".

Commenting on the index, Afrimat CEO Andries van Heerden said he was optimistic about opportunities in construction.

"Despite the prevailing economic headwinds, there are still nuggets of growth within our operating environment. Even though these are relatively small, they may well be working through the system, to be reflected in future results," Van Heerden said.

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