Civil construction industry confidence plunges

Confidence in the civil construction industry in the fourth quarter plunged to its second lowest level in more than four years. The FNB Bureau for Economic Research (BER) civil confidence index for the fourth quarter, released on Tuesday, revealed that confidence in the industry slumped by 17 index points to a level of 35 on a 100-point scale in the fourth quarter after cumulatively rising by 24 index points in the second and third quarters. The index was at a level of 28 in the first quarter of this year, its lowest level since the beginning of 2012. The lower confidence was attributed to deteriorating growth in construction activity and keener competition. Jason Muscat, a senior economic analyst at FNB, said this was a perfect storm, with the weaker activity and increased tendering price competition taking its toll on profitability.

“In fact, the index measuring profitability declined to its lowest level in two years,” he said. Muscat added the survey results confirmed what they had suspected for a while - that the civil construction sector remained under pressure. Llewellyn Lewis, the principal consultant at BMI-Building Research Strategy Consulting, said indexes were generally based on the opinions of people and he analysed the numbers. Lewis stressed construction industry activity was not derived from their confidence but the industry’s share of gross domestic product (GDP), gross fixed capital formation and plans in the pipeline. “To me it’s actually the confidence indicator behind the actual activity. It’s not about forecasting activity but a retrospective look that discounts everything they are thinking,” he said. Lewis said the outlook was for the construction sector to remain flat until 2020, with residential slightly up, non-residential slightly down and general building flat.

He said the industry was back to the new normal from the period 1993 to 2002, which was followed by the upswing to 2008 and then the downswing to 2012. Lewis questioned how bad it was for construction firms, stressing the new normal for the construction industry was that it was worth R50 billion in 2000 and was now worth R400 billion, which included a bit of inflation. “I’m a perennial optimist but if you look at the signals they are negative because of corruption. In a turbulent and chaotic situation, what do you expect people to be? Positive?” According to Statistics SA, annual growth in the real value of construction works contracted by 1.5 percent in the third quarter after declining by 0.3 percent in the second quarter. A large part of the weaker demand stemmed from a drop in government capital expenditure because of mounting fiscal pressures.

Muscat said the slowdown in government investment was unlikely to be a short-term phenomenon despite the government’s recent commitment to invest more than R900 billion in infrastructure over the next three years.