Brazil Construction Industry Recoils as Confidence Drops

By Sarah Brown, Contributing Reporter

RIO DE JANEIRO, BRAZIL – Two key indicators measured by FGV (Getulio Vargas Foundation) that reflect the construction industry conditions in Brazil reports a drop in confidence in the sector and a drop in construction costs across Brazil. However, the overall costs are still high and the outlook is pessimistic with expectations of little change for this scenario for the rest of the year.

The INCC (National Construction Cost Index) fell to 0.8 percent in July after rising to 1.25 percent in June. Yet on a larger scale, the index is up to 5.56 percent since January and 7.22 percent in the last twelve months.

The ICST (Construction Confidence Index) shows expectations in the construction companies are increasingly negative, with inter-annual variation at the end of July at -10.3 percent in comparison to June’s -9.8 percent. According to FGV, this is the fifth consecutive month that the ICST has shown unfavorable variance and the lowest since October 2011 with a rate of -10.4 percent.

To compare the index between June and July, the index rose from -8.9 to -12.4 percent, the worst result recorded according to FGV. The works connected to the World Cup and the weak housing market have been cited as explanations for this scenario, explains Anne Castle, coordinator at the Construction Project at FGV/IBRE.

“Due to the reduction of releases and sales the past two years, construction activity is slowing sharply,” explains Castle. “The worsening of expectations indicates that there should be no change to this situation in the second half” she adds, echoing the current bleak outlook for the construction sector.

The costs for Materials, Equipment and Services increased 0.45 percent in July totaling 3.79 percent this year and 6.66 percent in the last twelve months, whereas on the other hand the Labor group slid from 2.05 percent to 1.11 percent this month with 7.20 percent this year so far and accumulating 7.72 percent in the last twelve months, contributing to the drop in the INCC in July.

Subgroup Materials and Equipment costs rose from 0.38 percent to 0.52 percent in July, with a total of 3.83 percent since January and in the last twelve months 7.22 percent. Services fares similarly with a 0.18 percent rise this month after 0.34 percent in June.

Three of the seven state capitals analyzed by the FGV recorded acceleration in its growth rates in July compared with June: Salvador from 0.06 to 0.09 percent, Brasília from 0.58 to 3.26 percent, and Porto Alegre from 0.12 to 2.9 percent.

On the other hand there was slowdown in Belo Horizonte from 0.15 to 0.12 percent, Recife from 0.23 to 0.10 percent, and São Paulo from 2.61 to 0.24 percent. Rio de Janeiro was the only city where the figure remained stable, maintaining 0.10 percent in both June and July.

BMI (Business Monitor International) also released their report on real estate conditions on July 30, which reaffirmed the construction sector’s sluggish growth. “[…] the construction segment is also under-performing its potential. This is despite significant declines in industry costs, which resulted in deflation for the sector.”

However, BMI see the Olympics and need for related airport expansion as a positive that will drive the industry out of a slump, citing an anticipated construction growth of 4.2 percent for this year mostly due to necessary building facilities for the 2016 Olympics.