Johannesburg - Confidence in the building industry deteriorated in the second quarter of this year as further evidence emerged of a slowdown in the economy.
The decline was largely caused by a sharp drop in the confidence of building material contractors but confidence in all the sub-sectors making up the index was lower.
There was an unexpected slump in the building activity of non-residential contractors, while the activity levels of residential contractors continued to weaken.
John Loos, a property economist at First National Bank (FNB), said yesterday that the activity levels of quantity surveyors worsened noticeably, which meant the building pipeline overall deteriorated during the quarter.
This suggested the underperformance of the building sector seen in the second quarter might continue for the rest of the year.
The building confidence index released yesterday by FNB and the Bureau for Economic Research (BER) revealed that confidence dropped by 11 points on a 100-point scale to 41 in the second quarter of this year after breaching the key 50 index point mark in the first quarter.
The current level of the index meant that about 60 percent of respondents to the FNB/BER survey were dissatisfied with prevailing business conditions.
Loos said the decline in confidence was largely due to weaker domestic demand. He said domestic sales and orders received were much lower than in the first quarter. Although the export market remained buoyant, this was insufficient to boost confidence.
“The slowdown in domestic demand could also partly be due to the prolonged labour unrest in the platinum sector and while exports, mainly to the rest of Africa, remained robust, volumes are small in comparison to the domestic market.”
Loos said the results of the second quarter survey suggested that the recovery in the building sector was “nipped in the bud” just as it was gaining noticeable momentum.
He said this was particularly true for non-residential contractors, where the growth in building activity moderated unexpectedly while in previous quarters it was able to offset declining growth in the residential market.
“The fragility of the domestic market is further highlighted by the sharp decline in domestic sales for both retailers and manufacturers of building materials. Although the results regarding the building pipeline are mixed, on balance it is negative. This dampens the outlook for the sector going forward. In addition, weaker economic growth will also weigh on the sector.”
The confidence of main contractors dropped to 45 index points in the second quarter from 49 in the previous quarter as activity among residential and non-residential main contractors declined.
Loos said overall profitability of main contractors improved despite the drop in activity, possibly due to firms increasing their margins, especially in the residential sector. However, he said this might not be sustainable given the continued weakness in building demand.
The confidence of building sub-contractors dropped to 43 from 47 index points.
Confidence among architects and quantity surveyors surprisingly edged above 50 index points in the first quarter but dropped to 47 for architects and to 45 for quantity surveyors in the second quarter.
Loos said the only glimmer of hope was among retailers of building materials.
Although the confidence of retailers of building materials edged lower to 55 index points in the second quarter, the majority of respondents in this sector were still satisfied with prevailing business conditions, he said.
However, Loos said much of this optimism resulted from a rise in order volumes to be filled in subsequent quarters while the growth in sales in this quarter moderated.