Building confidence falls to three-year low

10th March 2016 By: Anine Kilian - Contributing Editor Online

Building confidence falls to three-year low

Photo by: Duane Daws

The First National Bank (FNB)/Bureau for Economic Research Building Confidence Index decreased to 39 points in the first quarter of 2016, from 48 points in the last quarter of 2015, marking its lowest level since early 2013.

The current level of the index indicated that more than 60% of respondents were dissatisfied with prevailing business conditions. In addition, of the six subsectors covered, all but one, namely main contractors, registered lower confidence levels.

This suggested a broad-based weakening in the industry.

Main contractor confidence edged slightly higher to 43 index points in the quarter under review, from 39 index points in the last quarter of 2015. 

“The rise in confidence betrays the much weaker building activity recorded during the quarter. This is especially true of residential building activity, which slowed noticeably following a strong showing towards the end of last year, while nonresidential contractor activity remained very weak,” said FNB property economist John Loos.

The overall profitability and level of competition among main contractors remained largely unchanged in the first quarter of this year, compared with the last quarter of 2015.

The biggest decline in confidence was registered in the building material retailers subsector, which fell to 39 index points in the first quarter of 2016, from 61 in the fourth quarter of 2015. This returned the index to the level reported in the third quarter of 2015.

“The results over the past few quarters suggest that growth in the retail hardware sector is losing momentum. Hardware retailer confidence and sales, a decent proxy for the informal building sector, fared well during 2013, 2014 and the first half of 2015. This helped boost overall building activity when the formal building sector was under pressure,” added Loos.

The fall in confidence was underpinned by a sharp deterioration in sales and profitability during the quarter.

The confidence of building material manufacturers, meanwhile, shed 11 index points to register a level of 20 in the first quarter of 2016.

Loos noted that this reflected weaker sales by building retailers, as well as the slowdown in main contractor activity. Building material manufacturers, however, were reasonably upbeat about prospects for sales and production during the next quarter.

Activity at the start of the building pipeline remained constrained in the first quarter of 2016.

“Despite there being some areas where activity improved, for the most part, it weakened. This does not bode well for the outlook for the building sector, particularly on the back of the disappointing performance this quarter,” said Loos.

As a result of the weaker activity, architect confidence lost 12 points and quantity surveyor confidence ten points in the first quarter of this year.

Subcontractor confidence was also lower at 43 index points, from 51 in the fourth quarter of 2015.

After recovering somewhat during the second half of 2015, activity in the residential building sector deteriorated noticeably in the first quarter of 2016. This, along with the continued weakness in nonresidential activity, meant that the overall building sector started the year on the back foot. In addition, support to the industry from the informal market had started to wane.

Looking ahead, the building sector was likely to remain under pressure.

“Not only is activity at the start of the building pipeline weaker, but broader macroeconomic factors such as constrained economic growth and rising interest rates will also weigh on the fortunes of the sector,” concluded Loos.