Construction – the Jewel in our Crown, by Cees Bruggemans

Construction is at present our best performing economic sector and will remain so for many years.

With the biggest construction companies hugely expanding their order books with contracts for Gautrain, power stations, roads, sports stadiums and other related infrastructure, as well as private sector orders, there doesn’t seem to be a limit to the bright prospects ahead.

According to SAFCEC, employment in the industry in the year through June 2008 increased by an estimated 14% to reach a level of nearly 136 000, the highest in decades.

Similarly, StatsSA has reported that local output in the construction industry in 2Q2008 was 13,5% higher than a year ago. This year construction is being outperformed by agriculture only, but longer-term construction is by far the fastest growing industry in South Africa.

The SARB quarterly bulletin this month reported that real spending on construction works in the 2Q2008 was 28% up on a year ago.

All this data reflects just how vigorous our infrastructure efforts are today, especially so at the larger construction companies.

But in size the construction sector is still very small, contributing only 3,6% to GDP, while construction works absorb 20% of total fixed investment spending and is equal to 4,5% of GDP (including, of course, a certain amount of imports as well).

However, there is more to the construction sector than just a few very big companies.

The FNB construction confidence index, compiled by the BER, dropped from 71 in 2Q2008 to 69 in 3Q2008.

This is still a very high confidence level, indicating that more than two-thirds of survey participants remain confident.

But it also shows up that nearly a third are no longer so inclined. This is reflected in relatively weak construction activity levels in the Western Cape and in a slowdown in township services and development.

A very large majority of survey participants (84%) are reporting insufficient demand. Consequently competition has increased, reflected in higher tendering activity.

Still, the broad construction outlook is for expansion at a rapid pace, especially among the major construction companies. But even the smaller to medium-sized companies expect business conditions to remain fairly stable in 4Q2008 as reported in our latest survey.

Cees Bruggemans is Chief Economist of First National Bank
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