The construction sector suffered its first contraction in nearly 11 years, with output falling by 2.9% in the quarter ending June 2024, hit by rising input costs, new data from the Kenya National Bureau of Statistics (KNBS) showed.
The cost of inputs including cement, quarry products, sand and paints rose over the three months, reducing demand for key raw materials and stifling activity in the sector.
The recession, which contributed 6.6 percent to the national GDP last year, was reflected in lower cement consumption and lower demand for iron and steel imports.
He added that indicators in the construction sector indicate a slowdown in sector activity. For example, during the second quarter of 2024, cement consumption fell by 7.8 percent to 2.05 million tons from 2.22 million tons in the corresponding period of 2023.
The quantities of imported bitumen also decreased by 8.1% to 15,566.2 tons, compared to 16,936.3 tons. Iron and steel imports decreased by 9.1% to reach 222,115.8 tons, compared to 244,250.3 tons in the same quarter of last year.
The construction sector was also suffering from a credit shortage in the same period as credit to enterprises in the industry declined by 7.5 percent to Sh131.1 billion.
Construction, mining and quarrying were the only economic sectors to contract in the second quarter, dragging down overall performance to slower growth of 4.6 percent compared to 5.6 percent a year earlier.
“The overall increase in the construction costs index in the second quarter of 2024 reflects higher costs of materials, transportation, fuel and labor. It is worth noting that it is the costs of materials such as cement, sand, ballast, paints, paving blocks and roofing materials that drove this index.
The inflation rate in the construction sector reached 3.53% in the second quarter, registering a more than double jump from 0.46% in June 2023 due to rising prices of materials, including cement, quarry products, sand and paints.
Civil engineering works have also become expensive due to the high prices of materials such as ballast, gravel and crushed stone.
The rise in some construction prices is due in part to recent tax measures that were desirable to protect domestic manufacturing from foreign competition.
For example, the Finance Law of 2023 imposed a 10 percent excise tax on imported cement at 10 percent of the customs value.
The Finance Law also imposed a tax to encourage export and investment amounting to 17.5% of the customs value of cement clinker, bars, rods, and semi-finished products of unalloyed iron and steel.
Analysts noted that the tax would protect the local industry but could harm the quality of products.
“It will be interesting to see whether the government will hold local manufacturers accountable to ensure local consumers are protected from low-quality products and local industry products maintain a competitive advantage in global markets,” KPMG said. note.
The export and investment promotion duties have had the unintended consequence of negatively impacting domestic cement manufacturing, as the bulk of the players do not produce their own clinker.