FNB Building Confidence drops moderately in 4Q2009

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 October 16 and November 16, 2009.

The index dropped from a value of 32 in 3Q2009 to 28 in 4Q2009. This follows on a rise of 2 index points in the previous quarter. Of the six sub-components of the FNB BCI, four registered a decline, whilst rises were recorded in the remaining two components during 4Q2009.

Relative to the situation in 3Q2009, the following declines in confidence levels took place, namely, architects (-12), quantity surveyors (-6), building contractors (-1), manufacturers of building materials (-23). Against this, improvements in business confidence of retailers of building materials (+9) and building sub-contractors (+6) were registered.

A closer inspection of the 4Q2009 business survey results indicate that the residential building cycle has bottomed, whilst building activity in the non-residential sector remains sluggish and still moderately trending down at present. The drop in confidence of manufacturers of building materials, after a notable improvement in the previous quarter, can possibly be explained by the fact that retailers that started restocking in the previous quarter, have now reached a more acceptable level of stocks in relation to expected demand. They are in all probability waiting for building activity to start showing more sustainable growth before upping inventories further.

Following on the marginal recovery in the business confidence of residential contractors in 3Q2009, a further moderate strengthening of 3 index points to a level of 21 was registered in 4Q2009.

Although the growth in building activity underperformed expectations during 4Q2009, it nevertheless showed an improvement on that done in 3Q2009. Given the second consecutive quarter of recovery in business confidence, it appears that the lower turning point in the residential building cycle has been reached and that a slow process of recovery is finally taking place.

New residential building work in general still remains relatively scarce, giving rise to a keen tendering environment. Nevertheless, respondents to the survey indicated that the growth in the profitability of their companies improved marginally or at least is no longer deteriorating as was the case in the past. A further positive result emanating from the 4Q2009 business survey was that although employment levels were still well below that of the same quarter a year ago, the retrenchment of labour has stabilized and has in fact showed a very marginal positive turnaround. Expectations are that more people could be employed in 1Q2010.

Residential contractors participating in the survey expressed the opinion that business conditions in general and the growth in building activity in particular were likely to show a further improvement during 1Q2010.

John Loos FNB Property Strategist announced that the business confidence of non-residential building contractors dropped slightly from a level of 33 in 3Q2009 to 30 in 4Q2009. Although overall business conditions underperformed expectations, it turned out more or less in line with that experienced by respondents in 3Q2009.

Loos stated that the growth in building activity deteriorated moderately in comparison with 3Q2009. For instance, whereas a net 77% of respondents to the 3Q2009 survey indicated that work executed was down relative the same quarter a year ago, the corresponding figure increased to a net 82% in 4Q2009. Similarly, the net percentage of participants that cited the lack of demand as a constraint on their business operations increased from a net 76% in 3Q2009 to 86% in 4Q2009.

He commented that respondents to the survey indicated that tendering competition for new building work remains keen and with margins under pressure, the growth in profitability of participating companies deteriorated during 4Q2009 compared to the previous survey quarter. Given the reported slowing down in workloads, respondents indicated that they resorted to labour retrenchments during 4Q2009. In this regard, a net 61% of participants to the survey noted that the number of people employed was below that of the same quarter a year ago.

Loos concluded that participants to the 4Q2009 survey do not expect business conditions to deteriorate notably in 1Q2010.

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FNB Building Confidence Index