SMALL UPTICK IN CONFIDENCE DESPITE SLOWDOWN IN CONSTRUCTION ACTIVITY

Supplied by CIDB

Confidence in the future of the construction sector has reached its highest levels in five years, despite a marked decline in business activity in recent months. This is a primary finding of the quarterly SME Business Conditions Survey conducted by the Bureau for Economic Research on behalf of the Construction Industry Development Board – cidb.

“The construction sector has been hard hit by the economic downturn which was aggravated by Covid-19,” says Bongani Dladla, Chief Executive of the cidb. “However, there are still positive sentiments that the industry might be on the road to recovery.”

“However, there was a huge improvement in sentiments, the index was at its best level since 2017”.

“The confidence level during the second quarter of 2022 was at 42 on the index, compared to 35 during the first three months of the year. We have seen a slow but steady rise for the past seven quarters since the early days of the pandemic,” says Dladla.

The Bureau for Economic Research has been conducting the quarterly business tendency survey on behalf of the cidb since 2008. It polls the opinions of senior executives in the building and civil construction sector within grades 3 to 8. The recent survey was done prior to the start of the current cycle of load shedding.

“The availability of work will remain under pressure for the foreseeable future,” says Dladla. “The vast majority of respondents, across the board, indicated that the lack of demand is a constraint on normal business operations.”

Among general building contractors, who have been struggling for months, sentiments improved from 33 to 44 on the index. Confidence in the civil engineering sector was supported by better activity and rose marginally from 38 to 40.

According to the survey “confidence trended higher even though activity deteriorated.” A total of 46% of respondents stated that activity was lower than a year ago and that their overall profitability remained weak.

From a grades perspective, contractors in Grades 3&4 and Grades 5&6 registered an uptick in confidence to 50 and 38 index points respectively. In contrast, contractors in Grades 7&8 registered a slight decline in sentiment. “According to contractors in Grades 7&8, activity worsened significantly in 2022Q2. This is a turnaround from the trend in recent quarters and likely kept a lid on sentiment” remarked Dladla

In terms of the regional comparison, the results for confidence were mixed. While sentiment almost doubled in KwaZulu-Natal (from 26 in 2022Q1 to 49), it fell in the Eastern Cape, to 41, from 62 in 2022Q1. Confidence in Gauteng and the Western Cape was unchanged at 32 and 29 index points respectively. A divergent performance in activity was also observed. While activity in the Western Cape improved nicely, and to a lesser extent in KwaZulu-Natal, contractors in Gauteng saw activity fall noticeably. “Even though confidence is still relatively low in the Western Cape, the developments recently with respect to activity are very encouraging. At the same time, the sudden drop in activity in Gauteng, which is the economic hub of the country, is cause for concern,” added Dladla. 

Boosting confidence was a decline in tendering price competition as well as respondents’ own expectations for activity next quarter. Only 18% of respondents stated that tendering competition was keener than a year ago. This is the best level on record, but not enough to offset the effect of lower activity on overall profitability.

 Order books remained under pressure with 79% of respondents indicating that the lack of new building demand places constraints on the business. More than half – 51% – of those surveyed, cited a lack of access to credit as a major constraint. This is the highest level on record.

 Marginally higher levels in civil engineering activities were reflected in the survey.

Respondents were also more optimistic with only 15% of participants predicting lower levels of construction activity in the third quarter of the year.

Interestingly, the rating of inadequate access to credit as a constraint jumped to an all-time high in 2022Q2. “Contractors seem to be faced with a number of headwinds, not only those posed by declining activity. This quarter we also observed that firms are struggling with access to credit,” said Dladla.  

He says the survey is a snapshot of sentiments among contractors in the building and civil engineering sectors at a time when the economy was under severe pressure. “The report is important for the entire country given the fact that the construction sector is a harbinger of broader economic activity,” he says.