Second quarter gross domestic product (GDP) data surprised on the upside, with the 3.1% increase from Q1 handily beating consensus estimates at around the 2.4% level, writes Andrew Bahlmann, MD: Deal Leaders Africa. However, the data shows that the construction sector remains exceptionally depressed. In the second quarter, construction declined by 1.6%, with StatsSA noting that “decreases were reported for non-residential buildings and construction works”.
This represents the fourth consecutive quarterly decline for the sector in a row, with nine out of the past 10 quarters being negative. This stretches back to the beginning of 2017. Construction is deep in crisis. A number of large construction companies have hit the wall in recent years, with the highest profile being JSE-listed Group Five and Basil Read. Both are in business rescue.
Based on our own market engagement in recent months, we have found that business confidence in the sector is at an all-time low. This is echoed by the FNB/BER Building Confidence Index. While it rose four points to 29 in the second quarter from an eight-year low, this level of the index still indicates that more than 70% of respondents are dissatisfied with prevailing business conditions. The sector also continues to shed jobs, according to the Quarterly Labour Force Survey, with formal employment declining by 116,000 year-on-year – or 11.8% – in Q2.
With conditions this depressed, we are not able to find buyers for local companies operating in the sector. Results are down off the back of government infrastructure spend and this has permeated into the medium enterprise’s financial performance.
The contrast could not be more stark in the technology (ICT), finance and fintech sectors. It is not uncommon to see triple-digit growth rates in fintech, in particular. We see a significant amount of confidence and strong financial results in these industries. Among our clients, we also see this solid growth and there is strong international interest.
The GDP data provides further evidence of the strong showing by this sector. The “finance, real estate and business services” sector grew by 4.1% in Q2, with it being the only sub-sector to have grown every quarter in at least the past four years. On an annual basis, this sector has grown by close to 2% every year since 2013. The sector continues to add jobs, with an increase of 105,000 (or 4.9%) year-on-year in Q2.
Across our book, more broadly, we are seeing three-quarters of our clients continuing to grow at above-inflation rates. Our larger clients – those with turnovers in excess of R100 million and strong net asset value in particular – seem to be thriving in this economy. These well-performing businesses exist in many industries; they are not just limited to fintech or ICT.
Given both their scale and excellent management teams, they are able to successfully weather the economic pressure. In doing so, they are ‘outlasting’ smaller and weaker businesses that simply do not have the balance sheet and reserves to trade through these conditions. The larger businesses are understandably capitalising on this, either by buying distressed businesses or by taking market share (or both).