One South African sector that has declined for nine years straight

South Africa’s economy grew strongly in the second quarter of 2025, with output rising by 0.8% quarter-on-quarter and above expectations. 

However, this strong performance masked yet another decline in construction activity in South Africa, with the sector now in its ninth consecutive year of decline. 

This is particularly worrying considering the construction sector’s vital role in employment in South Africa, given its ability to fairly quickly absorb low-skilled and semi-skilled workers. 

Its decline is largely due to a lack of infrastructure spending from the government and public companies, with gross fixed capital formation remaining below pre-pandemic levels. 

As a result, South Africa’s economy has become increasingly reliant on consumer spending through retail sales and financial services. 

This is feedback from Stanlib chief economist Kevin Lings, who outlined South Africa’s economic performance in the second quarter of 2025 in his weekly analysis. 

While the performance was strong and, encouragingly, driven by improved output from sectors across the board, it masked an underlying weakness in South Africa’s economy. 

This weakness is represented by the lack of gross fixed capital formation, which symbolises investment in new equipment, plants, and machinery. 

Fixed capital formation is different from portfolio investments in equities and bonds, which are often termed ‘hot money’ because they can just as easily leave the country as they come in. 

Fixed capital formation, or fixed investment, is the total investment a government or the private sector makes in fixed, productive assets, like roads, power plants, machinery and buildings.

In healthy and developed economies like the United States, fixed investment would usually make up around 25% of GDP. In South Africa, this figure has been stagnant at around 15%.

This decline in spending on productive assets, the rise of the construction mafia, and minimal infrastructure expenditure have significantly impacted the construction industry. 

This industry’s fortunes are also closely tied to those of the country’s mining industry, which has experienced steadily declining output.

Lings said the construction sector has declined by over 30% in the past nine years, marking nearly a decade of consecutive annual declines. 

South Africa’s ‘narrow’ economic growth 

The decline of the construction sector and the stagnation of South Africa’s mining and manufacturing industries have left the economy heavily reliant on consumer spending. 

This, Lings said, is largely driving South Africa’s economic growth alongside the country’s financial services sector. 

While the growth in consumer spending is encouraging, it is not enough to generate a meaningful increase in economic activity and reduce unemployment. 

For that to occur, South Africa needs a substantial increase in fixed investment to drive the productive sectors of the economy. 

“We still have 1% growth in South Africa. It is not as if we do not have any growth. It is not exciting, but we have some growth,” Lings said. 

“This growth is mainly driven by shopping, essentially. The production side of the economy is still substandard and languishing, but retail sales are growing well.” 

In effect, South Africa’s economy has become highly reliant on shopping for growth and banking to finance that shopping and facilitate transactions. 

While retail sales have nearly doubled in the past 20 years, mining and manufacturing output have declined in South Africa.

Some of this decline is driven by a reduction in South Africa’s mineral stock, as much of it has been mined out, particularly in relation to gold. 

Manufacturing’s decline is a story of the rise of Chinese imports and the headwinds the local industry has faced, from load-shedding to water outages to rising costs. 

Strong retail sales growth in South Africa is not enough to boost the economy, as it is driven by short-term factors. 

Retail sales growth has also largely been driven by clothing and not much else, meaning it is very narrow and sensitive to external shocks. 

“We have become super reliant on shopping, and we have to finance that, so there is a little bit of banking. That is not good enough,” Lings said. 

“It is not good enough because it is import-intensive. When we go shopping, we often buy goods from China and other parts of Asia. We do not benefit from that shopping. China loves our shopping.” 

As a result, the uptick in retail sales does not fully translate into economic growth, as much of the proceeds end up outside of South Africa. 

Furthermore, this growth is driven by short-term cyclical factors such as lower inflation and interest rates. These factors are very likely to reverse at some point and constrain consumer spending. 

“People shop more because they simply have more money. As disposable income grows, so does consumer spending and economic growth,” Lings explained.

The graph below, courtesy of Lings, shows the divergence between retail sales and the productive sectors of the South African economy.