Western Cape Business News

Send  Share  RSS  Twitter  30 Mar 2012

BUILDING: Industry In The Throes Of Stagflation


Recent Western Cape Business News

Not only does the building-construction sector remain in the doldrums, it is now apparently also entering a period of accelerated inflation, according to Bellville-based research group Rode & Ass.

This raises the spectre of the S-word – stagflation, a term used to describe a situation in which rising inflation is combined with stagnant or falling economic activity and employment.

According to the Bureau for Economic Research (BER), activity and employment in the building-construction sector have been shrinking since 2008.

The weak building activity is corroborated by the SARB statistics on gross fixed capital formation in the residential and non-residential sectors. Data representing the real value of new buildings put in place shows that residential building activity has been contracting since 2007, while non-residential activity has been in contracting mode since 2010.

Nonetheless, despite shrinking work volumes, growth in building-input costs and tender prices is now accelerating sharply – hence the S-word. In the fourth quarter of 2011, growth in building-input prices for commercial and industrial buildings (the Haylett index) accelerated to 7%, while tender prices (BER Building Cost Index) showed astonishing growth of 14%. But, it must be said that the 14% reflects a rebound, following years of building-cost decline. The current underlying growth in building costs is probably well below the double-digit mark, says John Lottering of Rode & Ass.

Input prices are driven by cost-push factors such as the softer rand (affecting imported plant and material prices) and higher fuel prices, which affect transport costs. The acceleration in tender prices is explained by the fact that over the past two years, contractors have trimmed their profit margins to the bone. With no more fat left, they have no option but to pass on higher input costs in the form of higher tender prices.

For now, a volatile rand, rising geopolitical tensions and the potential adverse effect of these on oil prices, as well as the coming April 2012 16% hike in electricity tariffs, pose the greatest upside risk to building-input costs and tender prices.

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