Civil Construction Confidence Takes a Knock in the First Quarter

Private Property South Africa
Cees Bruggemans

The FNB Civil Construction Index declined from an index value of 39 in 4Q2009 to a level of 25 in 1Q2010. This compares with an index of 60 recorded in 1Q2009. The sharp drop in confidence appears to be related to a deterioration in overall business conditions and the scarcity of new work. Cees Bruggemans, Chief Economist of First National Bank, said reports received from participants to the 1Q2010 business survey identified a number of factors that have resulted in a tougher business environment experienced during the survey quarter. Firstly, the contraction in the overall economy has resulted in a marked decline in private sector effective demand for civil construction works. Secondly, infrastructure projects associated with the Soccer World Cup are nearing completion. Thirdly, stemming from the impact of the global financial crisis, projects or portions thereof commissioned by public entities such as Eskom have been postponed or rescoped. Fourthly, expenditure at the local authority level has slowed down due to a notable slower growth in income and rising debt levels of taxpayers to municipalities which is currently above the 2% of GDP level. Fifthly, inefficiencies at provincial and local authority level results in long periods elapsing before tenders are adjudicated. Bruggemans stated that the growth in construction activity executed during 1Q2010 deteriorated compared to 4Q2009 and a net 69% of the respondents indicated that their work volumes were well below the same quarter a year ago. Tendering competition remained tight and a net 85% of the respondents reported that it was more intense than in the corresponding quarter a year ago. At that stage the figure stood at a net 64%, clearly reflecting the deterioration in business conditions and the constrained availability of new projects over the past year. In view of the weaker effective demand, margins have come under increasing pressure and are adversely affecting the growth in the profitability of respondents to the survey. Survey respondents reported that due to the decline in the availability of new construction projects, they were forced to resort to the retrenchment of labour during 1Q2010. Bruggemans concluded that as far as the business outlook for 2Q2010 is concerned, participants to the survey indicated that overall business conditions are likely to remain unfavourable and that no reversal in the sector’s fortunes is expected over the short term. There are likely to be significantly more job losses in the industry during 2Q2010.

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