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SIMON BROWN: I’m chatting now with research economist Dr Roelof Botha about the Afrimat Construction Index for the first quarter of 2023.
Roelof, I appreciate the early morning. The index for the first quarter did move weaker – not unexpectedly in light of high interest rates, inflation, load shedding and almost zero growth in the economy. It wasn’t likely to have a very strong quarter with all of that negativity around.
Dr ROELOF BOTHA: You’re quite right, Simon. The Afrimat Construction Index traditionally takes a dip, as does construction activity, in the first quarter. Most South Africans are not back in the office on January 2. As a matter of fact, some are not back in the office on February 2, which is the shortest month of the year.
And then in March we have a couple of public holidays. So the first quarter is not a very productive quarter in this neck of the woods. But there is some light here, especially with regard to employment.
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SIMON BROWN: The employment numbers – I’m glad you mentioned that because I picked up on that – year on year we are seeing a pickup in employment, which obviously bodes well. It tells us that there is activity happening.
Dr ROELOF BOTHA: Absolutely. Let’s be quite honest, the Stats SA employment data is probably an under-estimation. I travel through informal settlements on a weekly basis. Just to mention one place, Lethlabile in North West Province is a huge sprawling town which is becoming a city.
You see restaurants, a new mall being built there (Lethlabile), but most of the businesses in that area – informal hardware shops, etc – do not submit surveys to Stats SA, I [assure] you.
SIMON BROWN: A fair point to make. Another piece of good news was value added by the construction sector using constant 2023 prices – that also continued to tick higher. There was actually, I don’t want to say a ton of positivity, but certainly [there were] some green shoots coming through and that was one of them.
Dr ROELOF BOTHA: Yes, quite right. It has turned the corner, because that was one of the factors that has been pulling the Afrimat index down ever since Covid. It’s very encouraging. Obviously, what we try to do with this index from the beginning is to make 100% sure that it’s comprehensive. The dilemma is that the interest rates have taken their toll, big time on building plans passed and buildings completed.
SIMON BROWN: And then the other one – and I keep on harping around the capital formation from public and private – that’s also moving higher as a percentage of GDP. It is still way below where it should be, probably way below global levels, but again it’s moving in the right direction and suggesting that there is some activity there. Some of that might be in renewable energy and solar and the like, but still another positivity coming through.
Dr ROELOF BOTHA: Yes. Especially with regard to construction works and also buildings completed, which contradicts to some extent the other Stats SA survey on the value of buildings completed in the larger municipalities. So that bothers us a little and we’ve tried to look into that. But certainly, the ratio of public-sector capital formation in construction works has turned the corner – that has moved upwards after a long decline following the revelations of state capture around about 2016.
SIMON BROWN: The value [of] building plans passed and completed – Q1 is also weaker. I imagine again that comes back to your point that a lot of us just aren’t back at work at the [beginning] of January, and it is typically a quieter quarter.
Dr ROELOF BOTHA: Yes. But the extent of this decline – building plans passed declining by more than 19% year on year in real terms – is frightening. We have expected a decline because of the interest rates but, if you take most indicators related to credit-sensitive expenditure and plans to spend money on building a new house, this is not cheap. In some cases, of course, some people’s cars cost more than their houses [chuckling] – but it was to be expected.
What people don’t appreciate is that since they started the rate-hiking cycle at the end of 2021, the cost of credit as measured by the prime rate has increased by almost 70%.
This is crazy stuff. I don’t know what the Reserve Bank is thinking, what’s going on in the heads of those five individuals. My suggestion to government has been that they should seriously consider expanding the composition of the Monetary Policy Committee to also include economists from trade and industry, National Treasury and the private sector to take this decision, because the interest-rate decision affects the lives of 60 million South Africans.
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SIMON BROWN: We can see that. The other thing was that mortgage applications as rates go up just fall off the cliff. But I take your point, because the MPC currently is at five members but as constituted can have a whole bunch more. There are empty seats on that committee right now.
Dr ROELOF BOTHA: Exactly. And as also indicated by Prof Brian Kantor, why they continue raising the interest rate is beyond belief when it is as clear as daylight that inflation is dropping. The print came out yesterday. The CPI is marginally above their target range – which by the way is also not cast in concrete – and the producer price index has dropped by 52% since its high in July last year. So there is absolutely no reason for them to continue interest rate hikes.
They should actually be lowering interest rates because economic growth should be a higher priority right now, than forcing inflation down to within some target range which was never cast in concrete.
SIMON BROWN: Yes. I actually went digging on that. Inflation targets the world over are flexible numbers that, with respect to the economists – or the central banks rather – seem to be numbers that were just kind of made up, maybe over a bottle of wine one night.
We’ll leave that there. Dr Rudolph Botha, research economist, I appreciate the early morning.
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