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Business Confidence Remains Buoyant in Third Quarter 2007

08.24.2007

Business sentiment remains buoyant

The overall business confidence index (CI) for the current quarter remained at the 40.0 percent mark for the fourth consecutive quarter at 40.9 percent, up by 19.2 index points compared to the year-ago level. Quarter-on-quarter, however, the index fell by 5.5 points.  This quarter-on-quarter trend was consistent with the perception during the second quarter survey that the third quarter index would be slightly lower compared to the second quarter.

For the fourth quarter, respondents expected that business activity would surge as the index climbed to 53.0 percent, the highest level since the survey was first conducted in the second quarter of 2001.

During the quarter in review, respondents from the NCR (National Capital Region) were more bullish than their counterparts from the AONCR (Areas Outside the NCR).

Sectoral outlook consistent with overall outlook

Except for the construction sector, the sectoral sentiments on the macroeconomy in the current quarter generally tracked that of the overall sentiment as indices were on the uptrend, year-on-year, but lower quarter-on-quarter. Optimism in the construction sector, meanwhile, peaked at an all-time high of 53.1 percent in the third quarter.

Sentiment in the services sector remained strong at 53.3 percent. Respondents from the financial intermediation sub-sector registered the highest confidence level at 61.3 percent.  The CI of the hotels and restaurants sub-sector exhibited an increase for both quarter-on-quarter and year-on-year, reflecting strong tourist arrivals. The improvement in the community and social services sub-sector can be traced mainly to the favorable outlook of health care-oriented institutions such as hospitals, medical colleges, and insurance providers.

The outlook for the industry sector inched up year-on-year at 35.6 percent, but was lower quarter-on-quarter. Specifically, manufacturing firms noted that production during the third quarter traditionally slackens quarter-on-quarter due to the start of the wet season and the slowdown in consumer spending after the enrollment period. The CI for the wholesale and retail trade sector declined marginally at 35.1 percent.

All sectors were bullish about the economy in the fourth quarter, with all indices climbing up year-on-year and quarter-on-quarter. The services sector index was the highest at 68.1 percent. The business confidence of the construction sector continued to be on the uptrend, with the CI at 63.8 percent. This is the sector’s highest CI in 6 years, mirroring the upswing in the real property sector. The wholesale and retail trade sector as well as the industry sector edged up to 51.6 percent and 41.4 percent, respectively.

Reasons for the slightly cautious outlook

The slightly more cautious business outlook in the third quarter relative to the second quarter was attributed by respondent firms to the following factors: 1) the slackening of production for the third quarter due to seasonality; 2) possible slowdown in the US economy due to problems in the housing market; 3) competition of cheap imports mostly from China; 4) increase in crude oil prices; and 5) power and water shortage.

Businesses have an upbeat view regarding their own operations

The construction sector was the most optimistic, in their own operations in the current quarter, with its index at 43.8 percent. The wholesale and retail trade sector likewise continued to be upbeat as its index (at 16.8 percent) was up year-on-year and quarter-on-quarter. Confidence indices of the industry and services sectors at 15.9 percent and 43.5 percent, respectively, were higher year-on-year and almost steady compared to levels last quarter.

Access to credit, financial condition and employment improve; expansion plan index declines slightly

The access to credit index increased to 10.4 percent, indicating an improvement in the availability of lending facilities as perceived by respondents. This trend is consistent with data on outstanding loans granted by banks, which has been on the uptrend since July 2006. The financial condition index, though still in the negative territory, eased to -5.1 percent. This indicated that firms’ cash positions are becoming generally more liquid. The employment outlook index for the next quarter rose to reach an all-time high at 21.1 percent, indicating that respondents are optimistic about employment conditions. The employment outlook was particularly strong for the construction and services sectors. Meanwhile, 28.7 percent of respondent industry firms indicated plans to expand operations in the next quarter.

Business constraints

Executives continued to cite competition, particularly emanating from local firms, and insufficient demand leading to low volume of sales as major risks to their business.

Expectations on selected economic indicators

Majority of the respondents anticipated that the peso would remain strong in the third and fourth quarters. The inflation rate and interest rates are expected to decelerate in the third quarter but could move up in the fourth quarter.

Response rate

The third quarter 2007 BES was conducted from 09 July to 10 August 2007.  A total of 1,063 firms nationwide were surveyed. They were drawn from the Securities and Exchange Commission 2005 Top 5,000 Corporations as follows: 477 companies in NCR and 586 firms in AONCR, covering all 17 regions nationwide. The overall survey response rate for this quarter is 68.9 percent (71.0 percent last quarter). For NCR, the response rate was 66.9 percent (78.4 percent last quarter); and for AONCR, the response rate was 70.5 percent (from 65.0 percent).

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