The first quarter FNB/BER construction confidence index was released late last week and indicates that, after rising from 21 in 3Q11 to 26 in 4Q11, the rose further to 34 during 1Q12.
According to Cees Bruggemans, chief economist FNB, the rise in confidence was underpinned by continued improvements in activity levels and profitability but despite these more positive results, the demand for new construction work remained relatively weak, the cyclical recovery still being in its early stages.
Construction activity increased for the fifth straight quarter in 1Q12, pointing to a more sustained (albeit slow) recovery. However, the rate of increase moderated slightly compared to the second half of last year.
Construction activity flowed from a number of sectors and primarily from existing or ongoing projects:
- Within the public sector, work by Transnet (on the expansion of port facilities and the new multi-products pipeline between Durban and Gauteng) and some work from Eskom (on their Medupi, Kusile and Ingula power station projects) continued to support expenditure by public corporations. As for the government, spending on roads, water and waste water management projects remained dominant, especially at the municipal level.
- Construction work within the private sector emanated mainly from the mining sector. This was on the back of still relatively high commodity prices and in preparation for an expected increase in coal demand once Eskom's new power stations come on line.
Tendering price competition eased in 1Q12 after remaining unchanged between 3Q11 and 4Q11. This suggests that firms have taken the opportunity created by increased activity levels to relieve some margin pressure. Consequently, profitability was slightly up during 1Q12.New work slow
The increased activity levels have not translated into improved job creation with employment remaining almost unchanged from 4Q11.
Furthermore, as has been the case for a number of quarters, the rating of insufficient demand as a constraint to business remained stubbornly high. Activity is up, but the slow rate at which new work seems to be coming on stream could hamper the pace of the recovery in this sector.
The 1Q12 survey result is in line with other indicators, which over the past few quarters have also risen. For instance, after a long decline since 2008, the daily JSE construction and materials share price index rose from an average of 39.1 index points in 4Q11, to 42.9 points during 1Q12 (see graph below). Last week the index closed at 48.3 index points.
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 34, therefore, indicates that the majority of respondents (indeed 2-out-of-3) remained dissatisfied with prevailing business conditions.
The 1Q12 FNB/BER survey confirms that the construction recovery is indeed on track, but at a moderate pace as the lack of new work remains a constraint.
For more information, go to www.fnb.co.za/economics
FNB/BER Civil Confidence Index
Growth in construction activity
FNB/BER Construction confidence index vs.
JSE: Construction and Material index
Bar - FNB/BER Construction confidence index (LHS)
Line - JSE: Construction and Material index (RHS)
Source: BER Stellenbosch, Reuters