By Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole & Koketso Mano
Where to for the building sector?
The FNB/BER Building Confidence index, a composite index gauging sentiment in the entire building value chain, plunged by 16 points in 1Q24 to reach 27 points. This represents the lowest level since 1Q21 when the country was under Covid-19 lockdown restrictions. The souring sentiment in 1Q24 follows two quarters of confidence gains, which aroused hopes that a sustained uptrend may be on the cards for the building sector. The latest outcomes dented those hopes, more because four out of six sub-sectors saw a substantial decline. This suggests that the current constraints to confidence permeate the building value chain, ranging from architects to actual builders. In this report, we zoom specifically into the building industry (i.e., the actual erection of buildings) and assess some of the binding constraints to sentiment.
Confidence among builders declined from 48 points in 4Q23, to 39 in 1Q24 (Figure 1). The industry had experienced a reasonable post-pandemic recovery, where sentiment rose from 1 in 2Q20 to 49 in 1Q23- an eight year high. Interest-rate induced demand for housing between 2021 and 2022 first buoyed sentiment and, more recently, a recovery in non-residential building activity, particularly new office space in coastal towns that benefitted from the semi-gration trend.
So, what has changed?
Underlying data suggests that lack of demand is by far the biggest hinderance to business operations (Figure 2). The index tracking lack of demand as a business constraint, a proxy for order books, averaged 73 points in 1Q24, up from a recent low of 57 in 1Q23. This trend is consistent across residential and non-residential building industries, indicating that the recent resurgence in building activity is plateauing. Access to skilled labour is also fast emerging as a significant constraint to operations. This index edged higher to 54 points, from 41 in the previous quarter. This is the highest rating in 15 years (since 4Q08). While past concerns have centred around a 'brain-drain' in the industry due to lack of building work, recent security issues at construction sites may be further disincentivising skilled workers.
Looking at geographical indices, builders in Gauteng did not participate in the recent uptrend in building activity (Figure 3). Sentiment did not, at any point in the post-pandemic period, reach the neutral 50 index points mark in the province. In 1Q24, their confidence came in at 37 index points, an improvement from 32 in the previous quarter. In KwaZulu-Natal, confidence moved relatively sideways at 56 index points, with activity having benefitted from re-building efforts post the July 2021 riots and the devastating April 2022 floods. The biggest surprise came from the Western Cape where confidence suddenly plunged, from 61 in 4Q23 to 32 in 1Q24. From the results, it appears that while the Western Cape still has a better rating for building activity, it has the worst rating for access to skilled labour.
What does this mean for building activity going forward?
It is important to note that confidence indicators can be volatile and are prone to event risks. As such, one cannot simply extrapolate from one outcome. That said, the sustained pressure on order-books is a cause for concern. This is also supported by Stats SA data which shows that the real value of residential building plans passed, a proxy for pipeline building work, declined 23.1% y/y in 2023, while that of non-residential buildings fell by 9% y/y. Taken together, and considering our expectations of only a mild reduction in interest rates in the latter part of the year, it is likely that building activity will remain weak for the foreseeable future.
Week in review
Total mining production (not seasonally adjusted) contracted by 3.3% y/y in January, marking a deterioration from a downwardly revised 0.2% y/y expansion recorded in December 2023 (previously 0.6%). This outcome fell notably below the Bloomberg consensus prediction of a 0.4% increase. Seasonally adjusted output, which corresponds with the official calculation of quarterly GDP growth, contracted by 0.8% m/m, following a significant monthly decline of 4.6% in December (previously reported as -4.2%). While it is premature to gauge the likely contribution of the mining sector to 1Q24 GDP growth, this result clearly indicates a challenging start to the quarter.
Total mineral sales (a proxy for revenue) expanded by 5.7% y/y, reflecting a significant moderation from the 9.2% growth observed in December. Nevertheless, this outcome was supported by the high price of gold, given that mineral sales that exclude gold declined sharply by 11.2% y/y in January, following a decline of 14.6% in 2023. Ultimately, this decline is consistent with the weak contribution of the mining sector to government revenue, as evidenced by the poor performance in year-to-date total corporate income tax revenue.
Total manufacturing production (not seasonally adjusted) expanded by 2.6% y/y in January, accelerating from an upwardly revised 1.3% y/y growth recorded in December 2023 (previously 0.7%). The outturn surpassed the Bloomberg consensus prediction of a modest 0.9% increase. Seasonally adjusted output also increased by 0.8% m/m, rebounding from a 1.3% monthly contraction in December. This positive surprise contrasts with the Manufacturing PMI Business Activity Index, which sharply declined to 37.1 points in January from 51.4 in December.
Week ahead
On Tuesday, the BER inflation expectations survey results for 1Q24 will be published. In 4Q23, inflation expectations for 2024 and 2025 increased by 0.2ppt to 5.7% and 0.3ppt to 5.6%, respectively. This is while five-year-ahead expectations lifted to 5.2% from 5.1% previously. In addition, household expectations on medium-term inflation tilted upwards. Overall, this poses upside risk to the inflation trajectory and will be concerning to monetary policy. However, expectations for salary increases have edged lower, meaning that real wage growth expectations have softened, reducing prospects that higher inflation expectations will translate to wage and price pressures.
On Wednesday, data on consumer inflation for February will be released. Consumer inflation lifted to 5.3% in January from 5.1% in December, with monthly pressure of 0.1%. Driving the monthly pressure was core inflation, which added nearly 0.2ppt, food and non-alcoholic beverages (NAB) added over 0.1ppt but fuel shaved off over 0.2ppt. Core inflation lifted by 0.3% m/m and 4.6% y/y, the monthly lift was primarily driven by financial services and vehicles. Fuel fell 5.2% m/m but recorded inflation of 3.3% y/y. Food and NAB lifted by 0.6% m/m but continued its deceleration to 7.2% y/y from 8.5% previously. We expect further upward pressure on headline inflation in 1Q24, as periodical survey outcomes, such as medical insurance inflation, push core inflation up and fuel price inflation lifts. This is hopefully as food inflation continues to slow. In the next print, headline inflation could accelerate to 5.6% y/y (1.0% m/m). As the year progresses, the disinflation trend should continue.
Also, on Wednesday, data on retail sales for January will be released. Retail sales outperformed expectations and expanded by 2.7% in December, from a decline of 1.0% in the previous month. On a month-on-month basis, volumes increased by 1.4%, a momentum gain from the 1.1% experienced in November. Muted shopping activity at the end of 2023 was consistent with sentiment indicators in consumer facing sectors, which predicted weakening demand into the festive season. We expect this to persist in the near term, driven by sticky inflation, high interest rates and depressed consumer confidence. Furthermore, the prevailing tight lending standards and high debt service cost environment should keep credit growth relatively contained, both in the bank and non-bank sectors, and thus provide less support to consumption. That said, the medium- to longer-term outlook is slightly brighter. Consumers should benefit from the slowing inflation trend, positive employment gains, and the extension of the Social Relief of Distress (SRD) grant. In addition, the contemplated, albeit modest, interest rate cutting cycle should help support spending on discretionary items.
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 11 Mar | SA | FNB/BER Building Confidence Index | 1Q | 27.0 | 43.0 |
| 14 Mar | SA | Mining production %m/m | Jan | -0.8 | -4.6 |
| SA | Mining production %y/y | Jan | -3.3 | 0.2 | |
| SA | Manufacturing production %m/m | Jan | 0.8 | -1.3 | |
| SA | Manufacturing production %y/y | Jan | 2.6 | 1.3 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 20 Mar | SA | CPI % m/m | Feb | 0.1 | |
| SA | CPI % y/y | Feb | 5.5 | 5.3 | |
| SA | Retail sales % m/m | Jan | -- | 1.4 | |
| SA | Retail sales % y/y | Jan | -- | 2.7 |
Financial market indicators
| Indicator | Level | 1W | 1M | 1Y |
|---|---|---|---|---|
| All Share | 73,340.70 | -0.4% | -0.5% | 0.6% |
| USD/ZAR | 18.73 | 0.3% | -0.9% | 1.6% |
| EUR/ZAR | 20.39 | -0.3% | 0.1% | 4.5% |
| GBP/ZAR | 23.89 | -0.2% | 0.0% | 7.5% |
| Platinum US$/oz | 927.40 | 0.7% | 3.9% | -3.9% |
| Gold US$/oz | 2162.19 | 0.1% | 7.0% | 12.7% |
| Brent US$/oz | 85.42 | 3.0% | 4.2% | 15.9% |
| SA 10 year bond yield | 11.12 | 2.0% | 2.2% | 4.2% |
FNB SA Economic Forecast
| Economic Indicator | 2021 | 2022 | 2023f | 2024f | 2025f | 2026f |
|---|---|---|---|---|---|---|
| Real GDP %y/y | 4.7 | 1.9 | 0.6 | 1.3 | 1.6 | 1.8 |
| Household consumption expenditure % y/y | 5.8 | 2.5 | 0.7 | 1.4 | 1.6 | 1.8 |
| Gross fixed capital formation % y/y | 0.6 | 4.8 | 4.2 | 4.4 | 4.4 | 3.8 |
| CPI (average) %y/y | 4.5 | 6.9 | 6.0 | 5.2 | 4.6 | 4.5 |
| CPI (year end) % y/y | 5.9 | 7.2 | 5.1 | 4.8 | 4.8 | 4.5 |
| Repo rate (year end) %p.a. | 3.75 | 7.00 | 8.25 | 7.50 | 7.00 | 7.00 |
| Prime (year end) %p.a. | 7.25 | 10.50 | 11.75 | 11.00 | 10.50 | 10.50 |
| USDZAR (average) | 14.80 | 16.40 | 18.50 | 18.70 | 17.70 | 18.30 |
