Disappointing South African building confidence decline in 1Q11
By Cees Bruggemans, Chief Economist of FNB.
The FNB/BER building confidence index retreated from 38 in 4Q2010 to 24 in 1Q2011. This is the same level than in 2Q2010, which was the lowest in the recession.
The index can 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 materials (cement, bricks and glass) and retailers of building material and hardware. In contrast to the RMB/BER BCI, which includes only building contractors, the FNB/BER building confidence index covers the whole pipeline, from planning (represented by the architects and quantity surveyors), renovation (retail trade of building materials) and production (manufacturing of building materials) to the actual construction of buildings by main and sub-contractors.
The renewed decline in the FNB/BER building confidence index is disappointing for a number of reasons.
The drop in the confidence of architects and quantity surveyors can be attributed to an unexpected turn for the worse in the number of contracts awarded. Not only did the number of contracts awarded decline at a much higher rate compared to the fourth quarter, but the number of projects at sketch plan stage also fell sharply in the case of architects. This postponement of mainly non-residential projects can to a large extent be attributed to an oversupply / inventory overhang (which led to high vacancy rates and falling real rentals) and the strict criteria applied to all new bank loan applications.
The confidence of building material merchants declined on the back of slower growth in sales volumes. This slowdown is not entirely surprising, as the recovery was predominantly driven by a small market made up of households and firms that can afford to finance renovations out of their own pockets. (Such activity is not registered in the official numbers for bank credit or building plans passed.) More lively and sustainable growth in building materials requires that the market broadens. This, in turn, calls for more households and firms to invest in upgrading and renovating buildings out of their own pockets or to obtain bank loans to do so.
The fall in the confidence of manufacturers of building materials from 27 in 4Q2010 to 4 in 1Q2011 probably reflects disappointment that the demand from especially the civil engineering industry did not pick up. Demand from the residential and non-residential building industry is expected to continue to recover albeit at a later stage.
As mentioned earlier, the confidence of main contractors declined to 18 in 1Q2011 from 20 in 4Q2010 due primarily to the unrelenting contraction in building activity. Non-residential building activity continued to retreat at a higher rate than residential activity, although the tempo of decline in non-residential activity eased somewhat and that of residential activity picked up slightly during the first quarter relative to the fourth quarter. “The lack of demand for building work led to fierce tendering competition, which in turn continued to erode profitability and forced firms to keep on retrenching staff“.
The confidence of sub-contractors (i.e. specialised contractors such as plumbers, electricians, carpenters and shop fitters) increased marginally from 34 in 4Q2010 to 36 in 1Q2011. Given that they depend to a large extent on the main contractors for work, it is not surprising that they experienced the same conditions, namely an unrelenting decline in activity, fierce tendering competition and suppressed profitability. Retro fitting and renovations turned out an independent (i.e. work not stemming from main contractors) boost to non-residential sub-contractors. However, this appears to have come to an unexpected halt in the first quarter. (This, in turn, contributed to the slower growth that building material merchants experienced in the first quarter, as pointed out earlier.)
In conclusion: The disappearance of all signs of a recovery in the building sector that emerged in 4Q2010 is disappointing and has dropped us in unchartered territory.
Historically building contractor confidence recovers at the same time as the other sectors the BER surveys. Furthermore, a recovery in the leading building sectors (i.e. those involved in planning and renovation) usually foreshadows a rebound in actual building activity. At the moment none of these historical patterns hold true. So, this time around it has become impossible to foretell when the building sector is going to recover based on the historical evidence alone.
The size, tempo and duration of the previous upturn in the building industry as well as the change in the behaviour of banks following the introduction of the new credit act (NCA) and the global financial crises are probably the two main reasons why the typical cyclical recovery and the stimulatory effect of the low interest rate have so far not kicked in.
The expectations of the respondents are also not helpful in predicting the turning point. Respondents have been expecting a turnaround for many quarters and thus far none has materialised.
Therefore, the only option is to wait for signs that the building sector is recovering. When these signals appear, then the normal recovery of the building cycle will likely hold as in the past.
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Although the economy may already have entered an upward phase of the business cycle, the SA Reserve Bank has as not yet determined the lower turning point.
Residential contractors:Business confidence
Non-residential contractors: Business confidence
Source: BER, Stellenbosch.
Source: Cees Bruggemans, FNB, March 10, 2011.
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