Wednesday, 09 July 2008 02:00

Building Confidence Tumbles

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

Construction IndustryThe index is compiled quarterly from the building, manufacturing, retail and wholesale opinion surveys undertaken by the Bureau for Economic Research (BER) at Stellenbosch University. The BER business survey in the building industry was conducted between May 5 and June 6, 2008.

 
The index declined from a level of 66 in 1Q 2008 to 50 in 2Q 2008. The latter level compares with an index value of 88 in the corresponding quarter a year ago.
 
The decline in business confidence over the past quarter was due to a moderation in all categories, except in the case of quantity surveyors where confidence increased by 5 index points. The latter development can possibly be related to the fact that second quarter business conditions turned out somewhat better than expected by the respondents at the time of the previous survey. However, an analysis of other survey indicators shows that quantity surveyors are also starting to experience the moderation in overall building activity.

The second quarter growth in building activity in this sector of the building industry has hit a brick wall and was well below expectations. For example, whereas a net 39% of respondents expected a weakening in Q2 2008, the latest survey results revealed that in fact a net 69% experienced a decline in workloads.
 
Possible reasons for the sharply weaker demand for residential building were, amongst others, rising interest rates and building costs, tightening of credit standards by banks, the lagged impact of the introduction of the National Credit Act in 2007, a deterioration in consumer confidence and rising food and fuel price inflation that is eroding the buying power of consumers.
 
The weakening in demand levels resulted in a sharp rise in tendering competition. It was therefore not surprising that a net 68% of respondents to the second quarter survey reported that the profitability of their businesses deteriorated notably.
In view of the sharp deterioration in the tempo of residential building activity, job shedding took place. Indeed, a net 44% of the respondents to the survey reported that the number of people employed was below that of a year ago.
 
As far as business prospects for Q3 2008 were concerned, the view was expressed by respondents that business conditions were likely to remain unfavourable, but no major further deterioration was expected by the respondents to the survey.

Business confidence of non-residential building contractors moderated further from an index value of 78 in Q1 2008 to 70 in the second quarter. In Q4 2007 the index stood at 92.
 
Respondents to the BER survey reported that business conditions turned out well below expectations. For example, whereas a net 9% of respondents expected an deterioration in the growth in building activity at the time of the previous survey, Q2 2008 results indicated that a net 37% of non-residential contractor participants experienced a decline in activity.
 
The moderation in the demand for building work translated into a relatively sharp increase in the intensity of tendering competition. Given the foregoing development, margin compression ensued with the result that the overall profitability of the respondents to the survey deteriorated.
 
Growth in building employment remained fairly stable during the survey quarter, but respondents expect job shedding to occur during Q3 2008.
 
Regarding the prospects for 3Q2008, Loos said that the survey participants do not expect major changes in business conditions.

 

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