Rising FNB/BER building confidence index in 4Q2010

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By Cees Bruggemans, Chief Economist of FNB.

Building contractors continued to face difficult conditions during 4Q2010. However, the increase in the FNB/BER building confidence index signals early stirrings in parts of the building industry, with a possible broader recovery in building activity from later in 2011 onwards.

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The FNB/BER building confidence index increased from 29 during the 3Q2010 to 38 during the 4Q2010. The index could vary between zero (indicating an extreme lack of confidence) and 100 (indicating extreme confidence). It reveals the percentage of respondents that are satisfied with prevailing business conditions in six sectors, namely architects, quantity surveyors, building contractors, building sub-contractors, manufacturers of building material (cement, bricks and glass) and retailers of building material and hardware.

This differs from the RMB/BER business confidence index which surveys many types of businesses in various sectors, and in the case of the building industry only incorporates building contractors.

In contrast, the FNB/BER building confidence index covers the whole building industry pipeline, from planning (represented by the architects and quantity surveyors), renovation (retail trade of building material) and production (manufacturing of building material) to the actual construction of buildings.

The 4Q2010 figure of 38 is the highest in two years. Bar the second quarter of 2010 (when the index reached a low point of 24), the FNB/BER building confidence index remained almost unchanged at 30 since the beginning of last year.

The rise in the FNB/BER building confidence index can be attributed to a recovery in the confidence of the sectors at the beginning of the pipeline, namely planning and renovation. In contrast, the confidence of the sectors at the end of the pipeline, namely building contractors and sub-contractors, remained unchanged at a low level.

  • The confidence of architects increased from 34 in the third quarter to 48 in the fourth quarter and that of quantity surveyors from 24 to 47. The recovery in confidence is supported by a noticeable improvement in the number of contracts awarded. It usually takes at least a further 12 to 18 months before the actual building activity starts after the plans have been drawn up. This means that building activity is only likely to start recovering more pronouncedly from later in 2011 onwards.
  • The confidence of retailers of building material and hardware rose from 39 to 53 on the back of significantly stronger sales. The higher income increases (due to high salary increases and falling inflation and interest rates) and the resultant elevated confidence levels of high income consumers (those with incomes in excess of R10 000 per month) stimulated additions and renovations, which boosted the sales of building material and hardware dealers. A big part of this increased activity is not reflected in other closely watched indicators, as in many cases building plans do not have to be submitted or bank loans taken out. Given that a recovery in sales of building material have led a recovery in building activity in the past, the latest results once more point to an improvement in building construction further down the line.
  • After surging from 5 in the 2Q2010 to 18 in the 3Q2010, the business confidence of manufacturers of building materials (cement, bricks and glass) increased further to 27 during the 4Q2010. Although confidence is on the increase, conditions still remained pretty dismal. During the fourth quarter, manufacturers reduced production further because of rising stocks and falling sales. They were forced to discount prices to reduce unwanted stocks. Given high cost increases, the cut in prices hammered profits further in the short run. At this stage, the recovery in the confidence of manufacturers of building material, therefore, does not indicate an actual improvement in the current situation, but probably reflects an expectation that the situation will improve in the future.
  • As we predicted in the third quarter, both residential and non-residential contractors were too optimistic about the recovery and were therefore disappointed in the actual performance in the fourth quarter. The confidence of residential building contractors reverted back to 20 (from 25 previously), as activity contracted at almost the same high rate compared to the third quarter. The confidence of non-residential building contractors declined to 18 (from 26 previously), as activity fell at an even faster pace.
  • The confidence of building sub-contractors remained unchanged at a low level (34 compared to 33 previously). Activity receded further, as barely any new work came through from contractors.

In conclusion: The rise in the FNB/BER building confidence index is encouraging as it provides the first indication that building activity could begin to recover later in 2011. The recovery in the building sector usually starts on the residential side, followed by the non-residential side about a year later.

Should the building sector start to recover from later in 2011 onwards, it will have lagged the overall economic recovery by about the same length in time as in the previous cycle. In the last recovery, the economy began picking up in 1999, but the building sector only followed in 2002.

Cees Bruggemans, Chief Economist FNB    Cees@fnb.co.za

FNB Composite Building Confidence Index


Residential contractors:
Business confidence

Non-residential contractors:
usiness confidence

Source: BER, Stellenbosch

Source: Cees Bruggemans, FNB, November 29, 2010.

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