Slumping business confidence undermines building-construction activity

28-08-2012

Despite favourably low interest rates, a turnaround in fortunes for stakeholders in the building-construction industry should not be expected any time soon.

This is so when one considers business confidence levels that are taking a knock. Slumping sentiment amongst business decision-makers — representing the autonomous component of investment — could mean firms cutting back on additions to fixed capital, even if fundamental determinants of investment (such as real interest rates) have not changed. The correlation between changes in business confidence levels and the growth in building activity — growth in addition to the stock of residential and non-residential property — is shown in the graph that follows. The current poor showing of both residential and non-residential property fundamentals is, of course, not doing much to aid sentiment.

Similarly, there is a strong relationship between the growth in gross fixed capital formation (new capital investment in buildings, machinery and equipment) by private business enterprises and business confidence levels (second graph).

Considering that private business enterprises account for 60% of overall gross fixed capital formation, which in turn makes up 20% of the total expenditure on gross domestic product (GDP), continued weak sentiment amongst business decision-makers does not augur well for the economy.