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Stagflation hits building industry

Monday, November 17, 2008

An interesting observation in recent quarters has been the acceleration in building-input-cost inflation, while building-contract-cost inflation has been decelerating.

Referring to the situation Erwin Rode observes: ‘From a building contractor’s point of view, this sounds like stagflation.’

According to the Haylett Index (a measure of the movement of all input costs in the building industry), building-input-cost inflation is expected to show growth of around 16% in the third quarter of 2008, while building-contract-cost inflation (as measured by the BER Building Cost Index) is expected to have recorded growth of roughly 12%.

The main cause of the rapidly rising input costs has been the high prices experienced in crude oil, which contributed significantly to rising prices of construction materials. This is so because high-energy costs have a knock-on effect on the production processes of most construction materials, such as steel, cement and bricks.

Analysing the situation, Rode notes: ‘A reasonable prognosis is to expect that input costs will start moderating soon on the back of the worldwide economic slowdown. So this stagflation is probably a temporary situation. It’s nothing too serious to worry about.

Looking to the future, Rode also predicts that the profit margins for contractors will continue to come under pressure: ‘The big contractors may still have full order-books for now, but they’ll also soon be hauling out the worry beads; medium and small contractors are already finding themselves in deep trouble.’

Rode also reminds South Africans that, while economic conditions in South Africa may settle, the country won’t be seeing the same low interest or inflation rates that were experienced in 2005. He adds that the business community would be wise to err on the side of caution: ‘As we have discovered over the past year in particular, economic forecasts are moving targets!’

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