FNB Building Confidence rises slightly in 3Q2009

By Cees Bruggemans, Chief Economist FNB

The FNB Building Confidence Index measures the business confidence of all the major role players and suppliers involved in the building industry including architects, quantity surveyors, contractors, sub-contractors and retail merchants, and manufacturers of building materials.

The index is compiled quarterly from the building, manufacturing, and retail opinion surveys undertaken by the Bureau for Economic Research (BER) at Stellenbosch University. The BER business survey in the building industry was conducted between Aug 3 and Sept 1, 2009.

The index increased slightly from an index value of 30 in 2Q2009 to 32 in 3Q2009.

Of the six sub-components of the FNB BCI, three registered a rise, while declines were recorded in the remainder during 3Q2009.

Compared to 2Q2009, improvements in confidence levels were recorded among building contractors (+1), manufacturers (+23) and retailers of building materials (+13). On the other hand, declines occurred in the case of architects (-7), quantity surveyors (-4) and building sub-contractors (-15).

A closer analysis of the survey data shows that the downward spiral in the residential sector is probably close to a bottom, while the normalization of the destocking cycle of building merchants at the retail level has resulted in improved demand experienced by manufacturers of building products.

In contrast, the downswing in the non-residential sector is still firmly in place, hence the weakening of building confidence in the case of architects, quantity surveyors and non-residential building contractors.

The business confidence of residential contractors increased marginally from a low 17 in 2Q2009 to 19 in 3Q2009. This marginal recovery in confidence levels could well point to the private residential building cycle reaching a lower turning point. Business conditions turned out in line with expectations, although much weaker than the same period a year ago.

The growth in building activity remained very sluggish during 3Q2009, but that it showed a marginal improvement compared to the situation 2Q2009.

Given the weak state of the effective demand for residential buildings, the tendering environment remained very tight and competitive. In a sector known for intense adversarial tendering during periods of slowdown in the overall business cycle, respondents indicated that the overall growth in profitability of enterprises remained under severe pressure. In this regard, a net 84% of the respondents to the survey reported lower profit growth than in the same quarter a year ago. With the downdraft in residential building activity levels seemingly at long last arrested, respondents indicated that they did not engage in further extensive retrenchment of labour during 3Q2009.

Turning to short-term prospects for the residential sector, contractors expect business conditions and the growth in building activity to show improvement in 4Q2009.

After a sharp drop in the business confidence of non-residential building contractors in 2Q2009, a further marginal decline was recorded in 3Q2009. Compared to an index value of 36 in 2Q2009, it declined to 33 during 3Q2009.

The growth in building activity notably underperformed expectations during 3Q2009 and showed a marginal deterioration compared to the preceding quarter. A net 75% of survey respondents indicated that the growth in workloads was below that of the same quarter a year ago.

With a net 76% of survey respondents indicating insufficient demand for building work as a constraint on their business operations, tendering competition intensified during 3Q2009. As a result, the growth in profitability of respondents remained under pressure and notably underperformed expectations expressed at the time of the previous survey. A positive aspect of the survey results was that labour shedding appears to have stabilised. Nevertheless, a net 49% of respondents indicated that their employment levels were below that of the same quarter a year ago.

In conclusion, survey respondents do not expect business conditions to deteriorate extensively in 4Q2009.
 
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As from 3Q2009 the business confidence of wholesalers of building materials has been excluded from the FNB Building Confidence Index due to the extreme volatility exhibited by the former index over time. This adversely affected the value of the FNB BCI both from a current assessment, as well as from a predictive point of view.

Greg Beykirch | Finance Manager