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Business Outlook Remains Positive In the Fourth Quarter of 2004 and First Quarter of 2005


Signs of lower optimism

Results of the fourth quarter 2004 Business Expectations Survey (BES) showed that business confidence in the economy remained positive as the overall business outlook diffusion index (DI) registered18.6 percent and 21.3 percent, for the fourth quarter of 2004 and the first quarter of 2005, respectively. The declines in the DIs indicate respondents’ less optimistic expectations on business and economic performance for the next two quarters.  

NCR respondents registered declining business expectations in the next two quarters indicating an even less optimistic outlook for the first quarter of 2005. Business confidence index of respondent firms in areas outside the NCR also decreased compared to the previous survey. This could be explained by the fact that consumption expenditures usually peak during the Christmas season and slow down in the next quarter. 

Reasons for lower optimism 

Respondents attributed the decline in their business optimism to rising oil prices, increasing cost of raw materials, higher inflation, high interest rates and the fiscal deficit. Despite these concerns, business optimism remains due to anticipated increase in consumer demand during the Christmas holidays, increase in income due to the harvest season, expected increases in dollar remittances and export receipts. 

Expectations of a slowdown in the economy were further confirmed as majority of the firms projected lower volume of business in the fourth quarter of 2004 and in the first quarter of 2005. This sentiment is reflected particularly in the expected decrease in the volume of business activity index for NCR respondents in the fourth quarter and in the first quarter of 2005 compared to the third quarter. The corresponding index outside NCR, however, increased in the fourth quarter and increased further in the first quarter of 2005.  

Stable financial conditions and access to credit  

Indices for business-related factors showed a slight decline in financial conditions and credit access for respondent firms in the NCR.  

On the other hand, respondent firms outside NCR anticipate better access to credit and improving financial conditions compared to the previous quarter. The stable financial conditions and access to credit could be due to relatively stable interest rates despite rising inflation. 

Improving capacity utilization, employment and expansion plans 

Despite the decline in business optimism in the next two quarters, the expected average capacity utilization in the industry sector slightly improved to 75.4 percent for the fourth quarter from 74.8 percent in the previous quarter. This was due largely to the increase in expected capacity utilization of firms outside NCR while, average expected capacity utilization for NCR firms remained virtually flat at about 73.7 percent.  

Consistent with the expected slowdown in the growth of business activity in the next two quarters , the overall employment outlook index also decreased but remained positive at 7.5 percent from 16.8 percent in the third quarter of 2004. The decrease in the overall employment index is due to the decrease of the index in NCR. Cushioning the decline in the NCR, the employment index in areas outside NCR increased to 11.4 percent in the fourth quarter compared to 8.9 percent in the third quarter. Overall, despite the decline, with the continuing positive employment index both in the NCR and areas outside NCR, it is expected that new jobs will be created in the fourth quarter. The business sector further expect that compared to the previous quarter more new jobs will be available outside NCR while there could be a decrease in the number of new jobs created in the NCR for the fourth quarter. 

The business sector expects a decrease in the number of new jobs in the NCR but more new jobs will be available outside NCR. 

As the employment outlook index remained positive in the fourth quarter of 2004, firms with expansion plans in the industry sector slightly increased to 26.4 percent from 23.4 percent in the third quarter of 2004. 

Lower business confidence  

Consistent with the less optimistic business outlook for the fourth quarter of 2004 and first quarter of 2005, business confidence also showed positive but lower indices in the fourth quarter. The confidence indices for the industry and services sectors were most optimistic, followed by the wholesale and retail trade sector.  Only the construction sector registered a zero confidence index, which could be attributed mainly to seasonal factors. These overall trends reflect also the business confidence in the NCR. Outside NCR, however, the confidence indices for industry and services sectors increased while the indices for wholesale and retail trade and the construction sectors declined. 

Downside risks

The recent sharp rise in world oil prices poses probably the most important near-term risk to business, while the possibility of a general rise in inflationary pressures remains a medium to long-term concern.

 In addition to the macroeconomic risks, respondent firms cited stiff competition as the major factor that constrained production and business activity in the fourth quarter of 2004. Other major factors cited by respondent firms were unclear economic laws, high interest rates, and financial problems. 

Expectations on selected economic indicators 

Survey respondents anticipate the following in the current as well as in the next quarter:  higher peso-borrowing rate; higher inflation rate; and a weaker peso.

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