Room for encouragement on building plans

Building completions have weakened further in the second quarter of the year, but building plans passed are beginning to show signs of bottoming out, according to data released on Wednesday by Statistics South Africa.

Growth in building plans completed fell dramatically to -42.7% year-on-year (y/y) in June, from 23.9% y/y in May, as a result of a -33.1% month-on-month (m/m) decline in plans completed from May to June.

It appears as if the majority of buildings that had to be completed for the Fifa World Cup were done in May, resulting in a huge fall off in completions in June.

In addition, productivity in the sector may have also been negatively affected by the tournament during the month, contributing to the considerable contraction in June.

Nevertheless, in line with much weaker plans passed during 2008 and 2009, it is not surprising to see continued weakness in building plans completed in the economy.

As a result of completions being hastened for the soccer tournament, y/y growth in plans completed improved to -14.3% y/y in Q2 2010, showing considerable improvement from -36.4% y/y in Q1 2010 (albeit still in negative territory).

The improvement in the growth of plans completed during Q2 2010 is expected to contribute positively to Construction GDP growth in the quarter.

However, as with the retail sector, which has also been supported by the World Cup in Q2, the improvement is likely to correct to lower levels in Q3 and Q4, possibly resulting in further declines in employment numbers in the sector.

Also providing little encouragement, building plans passed declined by a further -21.0% y/y in Q2 2010 following a -5.9% y/y contraction in Q1 2010.

However, in contrast to the quarterly figures, year to date growth improved to -14.1% y/y in June 2010, from -29.4% y/y in June 2009, this suggests an underlying bottoming out in plans passed in the economy.

Growth in residential building plans passed has improved gradually over the past few months, and in June it recorded its first positive growth rate in 11 quarters at 0.3% y/y in Q2 2010, from -10.7% y/y in Q1 2010.

The above partly suggests that the negative impact of the National Credit Act has finally run its course in the residential buildings sector, with the largest declines in residential building plans passed having been recorded in 2007, following the introduction of the Act.

It is expected that lower interest rates will continue to stimulate growth in residential building plans passed over the remainder of the year, albeit only contributing to meaningfully to construction GDP at a lag in 2011 and 2012.

In contrast to residential building activity, non-residential building plans passed continued to contract in Q2 2010, at -40.9% y/y in the quarter, from -24.3% y/y in Q1 2010.

Weakening business sentiment and uncertainty with regards to business activity, is likely to be contributing to the weakness in non-residential construction, as well as further declines in private sector fixed capital formation in the remainder of the year.

The above suggest cautious optimism with regards to business activity and economic growth in the second half of the year: there is no doubt that the global economy is losing momentum, which will contribute to further delays in domestic investment and expansion decisions.

Source: I-Net Bridge