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Business Sentiment Improves in Q2 2009 and Turns Positive for Q3 2009


Business sentiment turns favorable

Business sentiment improved in Q2 2009 as the overall confidence index (CI) rose by 21.3 index points to -2.6 percent from -23.9 percent last quarter. It continued to improve going into Q3, with the CI reverting to positive territory at 13.7 percent, 20.2 index points higher quarter-on-quarter as respondents expected an economic turnaround to commence in Q3 2009. This means that optimists outnumbered the pessimists on the next quarter outlook. However, the Q3 index was down by 2.9 index points year-on-year.

This optimism was driven by improving confidence in the US and global financial markets— an upshot of the fiscal stimulus package committed by G20 nations. The announcement by the Philippine government of its Economic Resiliency Plan, the series of policy rate cuts and the decelerating inflation also helped lift business sentiment. Seasonal factors such as expected pick-up in demand during the summer season and school opening in June as well as new and improved management strategies also contributed to this development.

The business outlook in both the NCR (National Capital Region) and AONCR (Areas Outside NCR) tracked the national trend, with their CIs at lower negative in Q2 2009 but turning positive for Q3 2009. However, mixed trends were noted within the AONCR.  Firms from Regions I, III and XI were optimistic in both the current and next quarters as their indices for Q2 and Q3 2009 were both positive. Business sentiments in Region VII were becoming less pessimistic for both the current and next quarter. Meanwhile, responses of firms located in Regions IV and XII moved in the same direction as the national sentiment.

The outlook of all types of business (i.e., importers, exporters and those engaged in dual activities) in Q2 2009, although remaining negative, improved significantly as their indices increased, quarter-on-quarter. All types of businesses expected more favorable global trade conditions for Q3 2009 as their indices turned positive.

By employment size, medium and large firms showed a turnaround from negative to positive outlook in Q2 2009. By contrast, small firms remained pessimistic, though at a lesser degree, in the current quarter. A further analysis of the small firms surveyed showed that most industry firms, particularly from the manufacturing sub-sector, perceived themselves to be most vulnerable to the slack in demand from global and domestic markets. However, looking ahead to Q3 2009, small firms turned out to be the most optimistic. Medium and large firms were likewise more positive on the next quarter’s economic condition.

A positive outlook is evident across all sectors

Improvement in outlook was noted across all sectors in Q2 2009. The indices went up significantly compared to levels recorded a quarter ago. The construction sector was the most upbeat in Q2 2009 with a CI at 3.0 percent.

The services sector was also optimistic in Q2 2009 with a CI at 1.0 percent as it expected a boost in consumer spending due to seasonality. The hotels and restaurants, as well as community and services sub-sectors, both expected brisker business during the summer season. Notably, the financial intermediation subsector recorded the highest quarter-on-quarter and year-on-year increases in indices among subsectors.

The CIs of the wholesale and retail trade as well as industry sectors for Q2 2009 at -3.1 percent and -7.6 percent, respectively, were both higher quarter-on-quarter. This may be partly due to the expected pick-up in demand with the opening of classes in June.

Going forward, all sectors anticipated an economic turnaround in Q3 2009, as all industries posted positive indices. The construction sector was most optimistic with a CI at 20.0 percent as it expected to benefit from government infrastructure projects that form part of the 2009 stimulus package. Meanwhile, the wholesale and retail trade sector, although the least optimistic with a CI at 10.3 percent, was more upbeat for Q3 2009 than the previous quarter and the year-ago comparable period.

More firms see improvement in their business operations

Firms in the services sector expected their business operations to get better in Q2 2009. In the trade and industry sectors, more firms expected improvement in their business operations compared to a quarter ago. However, the pessimists still outnumbered the optimists.

Despite the expected improvement in business operations, the average capacity utilization at 69.2 percent was lower than the corresponding levels quarter-on-quarter and year-on-year.

Expectations of better credit access and financial conditions improve

The credit access index improved in Q2 2009 by 5.6 index points quarter-on-quarter, after three quarters of decline. The index, although negative at 7.2 percent, indicated that fewer firms expected tighter access to credit in the current quarter compared to the previous quarter.

The financial condition index, which is an indicator of internal liquidity, likewise edged up by 6.1 index points compared to its level in the last quarter’s survey. This implied that a fewer number of respondents expected liquidity problems in Q2 2009 compared to the previous quarter.

Employment outlook turns less negative but  the number of industrial firms with expansion plans still quite limited

The employment outlook index for Q3 2009 turned less negative at 6.4 percent compared to the previous quarter due largely to the increase in the employment indices of the trade and industry sectors.  However, given the current excess capacity in the industry sector, only 16.0 percent of respondents (from 17.8 percent in the last quarter survey), expressed expansion plans for Q3 2009.

Competition remains a major risk to business

Competition, weak demand, and financial problems were considered by the respondents as the key risks to business activity in Q2 2009.

Expectations on key economic indicators likewise improve

Generally, fewer firms anticipated that the peso would weaken, inflation would go up, and interest rates would increase in Q2 and Q3 2009. The outlook on the weakening peso was shared by fewer respondents compared to those in the previous quarter. Specifically, for Q2 2009, the peso-dollar exchange rate index at -10.2 percent increased by almost 2 index points compared to -12.0 percent in the previous quarter. Likewise, the number of respondents that indicated that interest rate would go up in the current quarter decreased relative to the previous quarter. On the other hand, the inflation rate index was steady at 14.1 percent. The same trend was observed for Q3 2009.

Survey response rate continues to pick up

The Q2 2009 BES was conducted during the period 1 April to 6 May 2009. There were 1,410 firms surveyed nationwide. Respondents were drawn from the Securities and Exchange Commission 2008 Top 7,000 Corporations as follows: 515 companies in NCR (36.5 percent) and 895 firms in AONCR (63.5 percent), covering all 17 regions nationwide. The survey response rate for this quarter was 77.6 percent, higher than last quarter’s 75.3 percent. For NCR, the response rate was 80.4 percent (73.2 percent last quarter); and for AONCR, the response rate was 76.0 percent (from 76.5 percent). A breakdown of responses received by type of business showed that 10.9 percent were importers, 7.5 percent were exporters, and 16.3 percent were both importers and exporters. About sixty-five percent of the respondents were neither importers nor exporters or did not specify their firm type.

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