Biz-Community (Cape Town)

21 January 2013

South Africa: No Festivity in Building Confidence

According to Cees Bruggemans, consulting economist to FNB, the FNB/BER Construction Confidence slowed in 4Q 2012, falling to 36 in 4Q 2012, after hitting a four-year high of 42 index points in 3Q 2012.

Construction activity slowed amid low levels of profitability and increased competition, employment eased slightly and overall, the survey results suggest that the recovery in the construction sector - especially in activity - likely slowed during 4Q 2012.

According to the South African Reserve Bank (SARB), construction activity rose by an annualised 7.0% in 3Q 2012, up from 4.9% in 2Q 2012. This is in line with survey results for last quarter. However, 4Q 2012's results point to a slight moderation in construction activity growth. Even so, at current levels activity remains higher than at the start of the year.

Construction work likely came from the following sources during 4Q 2012:

Government spending, especially among provinces continued. According to the National Treasury, provincial capex spending remained reasonably robust in 3Q2012, growing by 12.5% year-on-year (y-o-y). However, capex spending by municipalities remains below par.

Construction work by public corporations, Eskom, Transnet and Sanral in particular also continued.

The private sector probably underperformed to an even greater extent due to the unstable conditions in the mining sector.

Besides moderating activity levels, fiercer tendering price competition combined with weak overall profitability also contributed to the drop in confidence. Demand for new construction work remains fragile, resulting in somewhat more competition for projects that are eventually put out on tender.

2013 looking more positive

The outlook for 1Q 2013 is more positive, with activity and profitability projected to rise. However, employment prospects are expected to deteriorate further.

The slight drop in confidence suggests that the recovery in the construction sector recorded for most of the year moderated somewhat during 4Q 2012. The recovery did not come to a complete standstill, but continued at a weaker tempo.

Increased margin pressure, low levels of profitability and a mild slowdown in construction activity growth were the main culprits behind the fall in confidence in 4Q 2012. Prospects for 2013 are for continuing expansion, but at a relatively slow pace.

Methodology

Regarding the construction survey's methodology, the confidence index can vary between a maximum of 100 (which indicates that all respondents were satisfied with prevailing business conditions) and a minimum of zero (indicating that all respondents were unsatisfied). A level of 50 indicates that the respondents are equally divided between those satisfied and dissatisfied. The current reading of 36, therefore, indicates that more than 6 out of 10 respondents were dissatisfied with prevailing business conditions during 4Q2012.

Read the original story, with illustrations where appropriate.

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