Building sector confidence plummets to lowest since mid-2020
The FNB/BER building confidence index plunged 16 points in the first quarter to reach the lowest level since mid-2020, indicating respondents are dissatisfied with prevailing business conditions.
The index, which is compiled by FNB and the Bureau for Economic Research (BER), fell to 27 in the first quarter of 2024 after rising to an eight-year high of 43 in the fourth quarter of 2023.
FNB senior economist Siphamandla Mkhwanazi said the current level of the index means that more than 70% of respondents are dissatisfied with prevailing business conditions.
“Indeed, according to Stats SA, the real value of investment in buildings contracted by an annual rate of close to 6% in the fourth quarter of 2023,” Mkhwanazi said. “These results suggest that a similarly weak performance is on the cards for the first quarter.”
The FNB/BER building confidence index, which measures sentiment in the building sector, can vary between zero, indicating an extreme lack of confidence, and 100, indicating extreme confidence. It reveals the percentage of respondents that is satisfied with prevailing business conditions in six sectors, including architects, quantity surveyors, main contractors, subcontractors, manufacturers of building material suppliers.
According to the BER, in contrast to the RMB/BER business confidence index, which includes only main contractors, the FNB/BER building confidence index covers the whole pipeline, from planning (represented by the architects and quantity surveyors), renovations, additions, owner builders, the informal sector (represented by building material and hardware retailers) and production (manufacturers of building materials) to the actual erection of buildings by main contractors and subcontractors.
Mkhwanazi said looking ahead, the building sector was likely to continue to underperform given that activity at the start of the building pipeline — architects and quantity surveyors — fared dismally.
“That growth could be weaker going forward is also supported by the increase in new building demand as a business constraint,” Mkhwanazi said.
He said while there was a surge of building activity since the third quarter of 2022 due to increased private investment in energy and the lagged effect of the relatively low interest rate environment in 2021 and 2022, growth has since cooled.
A closer look at the data shows most of the sub-sectors included in the index experienced a marked fall in confidence. The data shows that building material manufacturers, building-subcontractors, architects and hardware retailers all fell in the first quarter.
Mkhwanazi said some of the listed hardware retailers had released poor company results recently and the confidence reading and survey activity data aligned with that. He said it was safe to say the pressure on consumers’ income had had an adverse effect on the demand for hardware.
He said growth in activity among building subcontractors also deteriorated, probably signalling a slowdown in demand particularly for electrical contractors that benefited from residential and non-residential demand for energy installations.
“While the fall in sentiment was broad based — and where declines were registered — it is encouraging that main contractor confidence was higher, supported by somewhat better activity,” Mkhwanazi said.
More positively, the main contractor sub-indicator confidence increased marginally to 42, from 41 in the previous quarter.
However, Mkhwanazi said a closer look revealed that an improvement in residential building activity was partially offset by a weaker non-residential building performance.
“Other indicators, such as overall profitability and tendering competition, were broadly similar to the fourth quarter, which also explains why confidence was little moved,” he said.
Mkhwanazi said the indices measuring the constraints to business operations worsened, specifically insufficient demand and a shortage of skilled labour, which rose to an almost six-year high.
“The survey among main contractors suggests that activity maintained its weak pace in the first quarter,” he said.
“However, the deterioration in order books and the dire situation at the start of the building value chain suggest that activity may deteriorate over the short term.”