The current level of the index means that more than seventy per cent of respondents are dissatisfied with prevailing business conditions. Underpinning the lower confidence was a noticeable decline in construction activity. According to Statistics South Africa (Stats SA), the real value of construction works contracted by 0.1% year-on-year (y-o-y) in 1Q2017, following growth of 2.3% in 4Q2016. The survey results for this quarter point to a more severe drop-off in 2Q2017.
“The fall in construction activity is consistent with an environment of constrained public sector capital expenditure. Therefore, although quite stark, the decline in activity is not entirely surprising,” said Jason Muscat, FNB Senior Economic Analyst. The decline in construction activity also caused profitability to deteriorate markedly in the quarter.
Other factors also likely weighed on confidence. “The spate of sovereign debt ratings downgrades, as well as the uncertain mining sector outlook in the wake of the New Mining Charter, bodes ill for the future of the civil construction sector. Some parastatals have already cancelled bond auctions due to fears that the uptake may be too weak because of the ratings downgrades. This affects their ability to fund large capital projects.” said Muscat.
In conclusion: After contracting slightly in 1Q2017, construction activity slowed more noticeably in 2Q2017. This weighed on profitability. As a result, confidence was lower. “Looking ahead, the factors leading to the slowdown in construction activity, namely a broad-based fall in demand led by the public sector, are unlikely to improve over the short to medium term. It is therefore reasonable to expect civil contractor activity to be under pressure for the rest of the year,” remarked Muscat.