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Civil construction confidence lifts, but pessimism remains - survey

Cape Town – Although confidence in the civil construction industry has lifted from a 17-year low recorded in the third quarter of 2017, most of the respondents to a FNB/BER survey still remain pessimistic.

The FNB/BER Civil Confidence Index gained four points to register a level of 19 in the fourth quarter. The current level of the index means that just over 80% of respondents are dissatisfied with prevailing business conditions.

"Although confidence was somewhat higher during the quarter, it still implies that the vast majority of respondents remain pessimistic about the state of the industry," said Jason Muscat, senior economic analyst at FNB.

Respondents are quite downbeat about the outlook. Not only do they expect construction activity in the first quarter of 2018 to be weak, the number of firms that cite inadequate demand for new construction work as a business constraint remains high.

"The factors that weighed on activity this quarter such as constrained public sector finances – which account for a large chunk of infrastructure spending – and policy uncertainty, as highlighted by the current impasse regarding the new mining sector charter, are largely structural in nature. It is unlikely that these will be alleviated any time soon," said Muscat.

                                                                                     

FNB/BER Civil Confidence Index

Percentage satisfied

 

                                                                                                    Source: BER Stellenbosch University


Although confidence was somewhat higher, it still implies that the vast majority of businesses are dissatisfied with the current business climate. This is largely due to a further slowdown in construction activity, which has now also influenced job creation in the sector.

"This is the second consecutive quarter that respondents report such a pronounced moderation in civil construction activity. This slowdown is underpinned by structural factors. Therefore, lower construction activity will likely persist over the short-to-medium term," said Muscat.  

                                                                                    

Civil construction

Growth in construction activity

                                                                                                                   

                                                                                      Source: BER Stellenbosch University

                                                                                       

"Although confidence was somewhat higher, it still implies that the vast majority of businesses are dissatisfied with the current business climate. This is largely due to a further slowdown in construction activity, which has now also influenced job creation in the sector. "This is the second consecutive quarter that respondents report such a pronounced moderation in civil construction activity. This slowdown is underpinned by structural factors. Therefore, lower construction activity will likely persist over the short-to-medium term," said Muscat.                                                                             

Civil construction

Tendering competition

                                                                                                                


 Source: BER Stellenbosch University

Civil construction activity continued to weaken in the quarter, partly justifying the current pessimism. Statistics South Africa (Stats SA) reported a marked slowdown in real, seasonally adjusted, growth in construction works to 0.3% year-on-year (y-o-y) in the third quarter of 2017, from 3.3% in second quarter.

"The moderation in growth in the third quarter was consistent with last quarter’s survey results and it is likely that growth was even weaker in the fourth quarter of 2017. With growth currently barely positive, we may even see a contraction," explained Muscat.

The softer growth in construction activity also weighed on profitability despite somewhat less keen tendering price competition.

"While the impact of lower activity on profitability is worrying, of additional concern is the effect it has on employment in the sector. The index measuring employment growth reached its worst level since mid-2011," said Muscat.

Reports of construction sector confidence plummeting to 17-year lows should not be the reason for investors and developers to lose complete faith in the industry, according to the Building and Property Economics Committee of the Association of South African Quantity Surveyors (ASAQS).

“Low confidence in the construction sector is cause for concern due to the impact on investment and risk,” says James Hanley, chair of the committee.

“The built environment is however known for being cyclical, and these cycles last approximately three years.”

While sensible business planning and building up reserves in their practices is the standard recommendation during times of high confidence and investment, built environment professionals tend to be at the mercy of the market.

What is needed to smooth out the cycles is better governmental planning and longer term infrastructure commitments that enable the sector to respond and build capacity.

The committee cautions against panic to reports of economic downturn and low investor confidence, and instead advises built environment professionals to make use of any surplus time they might have available to develop and broaden their skills.

While it might seem counterproductive to seemingly take time away from business development to strengthen or diversify the professional skill set, the focus should be on the long term sustainability of the professional team.

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