27 February 2024

Caption: Economist Azar Jammine

Economist Azar Jammine shed light on the nation’s economic landscape, particularly focusing on the construction sector at the 2024 edition of AfriSam’s national budget presentation.

Jammine looked at capital investment trends in South Africa, shedding light on both the challenges and the faint glimmers of progress within South Africa’s economic landscape.

A notable trend emerges from the data, revealing a concerning decline in capital investment juxtaposed against the backdrop of rising consumer spending. This imbalance poses a structural challenge as sustained economic growth necessitates robust investment in capital formation. Encouragingly, since 2020, there’s been a notable uptick in capital investment, signalling a potential shift in the right direction. However, a recent dip in the third quarter warrants caution, emphasising the fragility of the recovery trajectory.

The decline in fixed capital formation, from a peak of 24% of GDP in 2008 to below 13% in 2020/21, paints a stark picture of the challenges faced. Comparatively, emerging markets typically allocate 25 to 30% of GDP to capital projects, highlighting a significant shortfall in South Africa’s investment landscape. While there has been a slight rebound to over 15%, the road to recovery remains fraught with obstacles, many of which stem from issues like corruption and crime.

Examining the breakdown of investment reveals contrasting trends among different sectors. Private sector capital formation emerges as a resilient performer, outpacing government investment, which has stagnated in recent years. However, public corporations, including state-owned enterprises (SOEs), have experienced a sharp decline in investment capacity, further exacerbating the investment deficit.

Notably, machinery and equipment investment have shown signs of recovery, albeit overshadowed by a concerning decline in construction sector investment. Construction activity has plummeted by 45% since 2013, with little indication of a turnaround. Both residential and non-residential building projects have borne the brunt of this downturn, with commercial space witnessing an alarming 80% decline in planned projects.

The aftermath of Covid-19 has exacerbated existing challenges, particularly in the commercial real estate sector, where office space demand has waned significantly. Residential construction, while initially buoyed by post-Covid adjustments, is now showing signs of faltering, evident in declining building plans for townhouses, flats, and housing.

Interestingly, a regional divergence in building activity highlights the Western Cape’s resilience, surpassing Gauteng as the leading region for building plans. This surge correlates with the region’s burgeoning status as a ‘semigration’ destination and infrastructure development, reflecting a localised bright spot amidst broader economic uncertainties.

While the uptick in capital investment offers a glimmer of hope, South Africa’s economic recovery remains tenuous. Addressing systemic challenges, from corruption to market confidence, is imperative to sustainably stimulate investment and reignite growth across sectors. Collaborative efforts between the public and private sectors will be crucial in charting a path towards a more prosperous and resilient future for South Africa’s construction industry and the broader economy.

Assessing economic indicators and workforce dynamics

Jammine’s analysis takes a comprehensive look at various economic indicators and their implications for South Africa’s workforce dynamics, shedding light on both challenges and potential avenues for improvement.

Examining recent trends in consumer spending and investment, there’s a nuanced picture emerging. While retail sales have seen a significant uptick over the past decade, signalling robust consumer activity, concerns arise regarding the dependency on imports and the lack of commensurate growth in production. This imbalance underscores broader structural issues, including the inadequacy of education in fostering a skilled workforce conducive to industrial growth.

Moreover, despite government initiatives to promote reindustrialisation – the reverse is occurring. The industrial heartland of the country encompasses mining and manufacturing has faced significant setbacks. Both sectors have experienced declines in output, reflective of broader challenges such as electricity shortages, transport inefficiencies, and the lingering effects of Covid-19 on commercial real estate demand.

However, amidst these challenges, there are glimmers of hope. Foreign tourism has shown a sharp recovery, providing a much-needed boost to the economy. Additionally, recent improvements in formal sector employment signal a potential turnaround, albeit modest, in job creation. This uptick in employment, coupled with a decline in the unemployment rate, albeit from staggeringly high levels, suggests a gradual shift in the right direction.

Nonetheless, structural issues persist, particularly in the construction sector, which has lagged behind the broader economy in terms of employment and output. The decline in construction activity has been pronounced, with employment levels in the sector plummeting. Addressing these challenges requires concerted efforts to address policy shortcomings, promote investment in infrastructure, and enhance workforce development initiatives.

Looking ahead, the path to economic recovery hinges on addressing systemic issues plaguing key sectors, fostering a conducive business environment, and bolstering investment in critical infrastructure projects. Collaborative efforts between the public and private sectors will be essential in driving sustainable growth and creating meaningful employment opportunities for South Africa’s workforce.

While the road ahead may be fraught with challenges, there are opportunities for progress and renewal. By leveraging existing strengths, addressing weaknesses, and fostering a culture of innovation and collaboration, South Africa can chart a path towards a more prosperous and inclusive future for all its citizens.

Read the latest issue

Latest Issue