Civil construction activity poised for more meaningful recovery?

Civil construction activity is poised for a more meaningful recovery in coming months according to early signs, with industry confidence showing a significant increase.

The FNB/BER Civil Confidence Index rose from 24 in the third quarter to 31 in the fourth. The 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 dissatisfied.

Conditions improved largely across the board, but the feedback regarding growth in construction activity was particularly upbeat, says Siphamandla Mkhwanazi, senior economist at FNB. After registering a low of 9 in the first quarter, the confidence of civil contractors gradually rose over the course of the year to its best level since the beginning of 2017.

However, sentiment is still considered more downbeat despite the improvement considering the long-run average of 43 with the current index level indeed meaning that slightly less than 70% of respondents were dissatisfied with prevailing business conditions.

Confidence ticked up on the back of better activity and in turn, profitability. “Last quarter the survey results indicated a marked increase in quarter-on-quarter activity growth. Encouragingly, there seems to have been a further improvement in the fourth quarter,” Mkhwanazi says.

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Civil construction prospects for 2023

Respondents were also upbeat about prospects for the first quarter of 2023, which could also have lifted confidence. “History has taught us that we need to take respondents expectations with a pinch of salt. This is even more so this quarter as many of the comments regarding the outlook relate to an increase in work on renewable energy projects. Realistically, it is uncertain at this stage just how quickly investment in green energy will progress.”

On the other hand, the more optimistic view on the outlook is somewhat supported by the rating of insufficient new demand as a business constraint, a proxy for order books, which eased to 73% from 83% in the third quarter.

Mkhwanazi says while the results for this quarter are encouraging, the disconnect between activity growth (which is well above the survey’s long-term average) and sentiment (which is stuck well below 50 compared to a long-term average of 46) highlights the effect that factors not expressly surveyed have on the mood of contractors.

“Once again, concerns around the protracted delays between tender adjudication and award and the cost of business forums, or the construction mafia, were mentioned. These concerns weigh increasingly on sentiment.”

The higher confidence was supported by better activity and profitability and Mkhwanazi says there is a clear improvement in civil construction activity this quarter which should continue into 2023.

“However, this should be viewed with caution as respondents pin much of their optimism relating to future activity on renewable energy projects. We have been disappointed by the pace of the rollout of these projects in the recent past,” he says.

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