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Low demand keeping construction in the doldrums - economist

Construction activity continued to decline in the second quarter of the year, reflecting sustained low confidence in the industry.

The FNB Civil Confidence Index for the second quarter of 2018 was released on Tuesday, based on a survey conducted between April 23 and June 5.

The index increased by three points to 15, having fallen to a record low of 12 in the first quarter. "The current index level means that 85% of respondents are dissatisfied with prevailing business conditions," the report read.

In a statement on the latest index, Jason Muscat, senior economic analyst at FNB, said that data from Statistics South Africa (Stats SA) showed the real value of construction works fell by 2.6% year-on-year in the first quarter. "A fall of similar, if not greater, magnitude is likely in 2Q2018 (the second quarter)," he said.

The fall in construction activity also resulted from an increase in tendering price competition. This is the extent to which firms need to adjust profit margins downwards to put in a competitive bid.

"Almost all survey respondents stated that tendering competition in 2Q2018 was keener compared to a year earlier. It was last this high in 1999," said Muscat.

Further, short-term prospects are also low, as there is a lack of new construction demand according to the majority (91%) of respondents.

"Financial difficulties at parastatals, along with fiscal consolidation by government, will likely see public sector spending on infrastructure remain weak. At the same time, the mining sector remains under pressure.

"This should stifle private sector demand," Muscat explained.

 "The results this quarter confirm that the environment for civil contractors remains difficult.

"This is in line with reports about possible consolidation in the sector, as well as industry stalwart Basil Read’s recent application for voluntary business rescue," he added.  

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