FNB: Construction confidence index up

The FNB/BER civil construction index increased from 51 to 66 points for the fourth quarter of last year, First National Bank said on Wednesday. “The rise in confidence was mainly supported by a recovery in construction activity as well as a moderation in tendering competition,” the bank said in a statement. After the index increased by six points in the third quarter of 2013, its current level was the highest it had been at since September 2008. The index's current level meant that around seven out of 10 respondents were satisfied with prevailing business conditions during the fourth quarter of 2013. The bank's chief economist Sizwe Nxedlana said: “All of the underlying indicators improved during the quarter. This is a clear sign that conditions in the construction sector are indeed getting better.”

What was most encouraging was the rise in construction activity during the fourth quarter. The most likely sources of construction during the fourth quarter were capital expenditure by government. Provincial capital expenditure was expected to increase, albeit at a modest pace, with the National Treasury indicating that by the end of September 2013 year-on-year it had increased by 2.7 percent. “In contrast, capital expenditure by municipalities accelerated noticeably in the first quarter of the financial year (July to September), rising by 18.9 percent year on year,” the bank said. “Public corporation capital expenditure could also have accelerated as a result of fewer disruptions at key construction sites/projects.” Construction spending by the private sector most likely continued, however it accounted for only a small share of total construction work.

Respondents also reported a significant moderation in the level of tendering competition. “This could be as a result of the increase in construction activity. With more work available, firms can now be more selective with the projects for which they tender,” Nxedlana said. At the current level, tendering price competition was at its lowest level since mid-2007. However, despite the rise in construction work and less keen tendering competition, profitability remained largely unchanged. “Input costs have slowly risen over the past few months. This could be weighing on profitability despite the improvement in activity and competition,” said Nxedlana. With the outlook for the first quarter of 2014 relatively optimistic, this further supported the rise in confidence.

“In conclusion, the pace of the recovery in the construction sector quickened during the quarter, especially in terms of construction work, which disappointed somewhat in the third quarter of 2013,” FNB said. “Looking ahead, growth in construction activity in the first quarter of 2014 is expected to continue at more or less the same pace as in (the previous quarter).” However, gains in confidence might be limited if input cost pressures continued to weigh on profitability.