The Impact of Macro-Economic Factors on Construction Output in Kenya

Abstract

Currently in Kenya, the relationship between construction industry output and macro- economic factors is not clear. In actual practice, that relationship is normally expressed in qualitative and heuristic terms which are often inaccurate. This is a cause for concern since the industry plays a major role in the country’s economy. For instance, all the constructed facilities in the country are supplied by the construction industry. Without further elucidation on the roles of the construction industry, it can simply be termed as the backbone of the economy without which, the economy cannot stand. Therefore, this paper empirically presents a study indicating objectively how macro-economic factors impact on annual construction output in Kenya. The study further demonstrates how these can effectively be used as policy decision basis for the management and control of output for the construction industry. We investigated the influence of macro-economic factors on annual construction output in Kenya. To achieve these objectives, this study followed a quantitative approach where a longitudinal study design was adopted. The study variables included annual construction output, inflation rate, unemployment rate, commercial banks weighted interest rate, population growth rate and US dollar to Kenya shilling exchange rate. Time series data analysis was used to analyze data obtained from central bank of Kenya (CBK) and Kenya National Bureau of Statistics (KNBS) with the aid of abstraction sheet or checklist covering forty-three (43) years from 1977 to 2019. Eviews; a statistical computer software package was used to analyze the data where annual construction output was regressed on annual macro-economic factors. The first differences of natural logarithms of annual construction output, second differences of population growth rate, first differences of commercial banks weighted interest rate, unemployment rate, inflation rate and US dollar to Kenya Shilling exchange rate were used in the analysis. Multiple regression output tables of current and lagged macro-economic variables showed insignificant influence of macro- economic factors on annual construction output in Kenya in 2020. It was however observed from regression of lagged macro-economic values that construction output in Kenya responds to the effects of the factors more than a year after they are implemented. Models to this effect have been developed having coefficients of determination (R2) values of 0.13 and 0.48 respectively. It is therefore illogical to conclude that the factors have impact on construction output on the current year but in the later years as indicated by a higher R2 value of 0.48 against an R2 value of 0.13 in the current year. Based on the results obtained, we propose that macro –economic factors can be used as policy instruments for managing and controlling Kenya’s construction industry.