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Business Confidence is Higher in Q2 2012

05.24.2012

Business sentiment is stronger

Businesses’ outlook on the economy continued to improve in Q2 2012, with the overall confidence index (CI) rising for the fourth consecutive quarter to 44.5 percent compared to 40.5 percent in Q1 2012 and 31.8 percent in Q2 2011. The confidence index is computed as the percentage of firms that answered in the affirmative less the percentage of firms that answered in the negative with respect to their views on a given indicator. 

The increased confidence of businesses suggest that a faster pace of economic expansion could be expected in Q2 2012. Respondents cited the following factors for their continued optimism: (a) increase in orders and new contracts/projects leading to higher volume of production;  (b) expansion of businesses and new product lines; (c) increased government spending; and (d) seasonal uptick in demand during summer and the enrollment and harvest seasons. Also contributing to businesses’ improved sentiment were the prevailing favorable macroeconomic conditions such as lower interest rates and manageable inflation as well as the steady growth of overseas Filipinos’ (OFs) remittances that contributes to a healthy external payments position. The sentiment of businesses in the Philippines mirrored the improved business outlook globally, particularly in the US, Germany, Australia, New Zealand, Hong Kong, Korea and Singapore.

Businesses anticipated economic expansion to continue in Q3 2012, although growth could be slower as the next quarter CI remained positive but declined to 44.6 percent from 55.4 percent in the previous quarter. This is due in part to expectations of slower demand and slack in business activity during the rainy season in the industry, wholesale and retail trade and services sectors.

Outlook turns more buoyant in both NCR and AONCR

Tracking the national trend, the sentiment of businesses in both the National Capital Region (NCR) and Areas Outside the NCR (AONCR) improved for the current quarter but turned less sanguine for Q3 2012.  For both the current and next quarters, NCR respondents remained more optimistic in their outlook on the economy than those from AONCR.

Firms engaged in international commodity trading are more optimistic

Firms engaged in international commodity trading were more optimistic in their outlook in Q2 2012. Importers were the most bullish while exporters manifested the biggest improvement in sentiment largely due to continued high metal prices and stronger production volumes.  The optimism of dual-activity firms likewise increased in Q2 2012. For Q3 2012, even as the overall business outlook was less optimistic, the outlook of exporting firms improved compared to a quarter ago while those of the importers and dual-activity firms declined, similar to the national trend.

Outlook of large-sized firms is most upbeat

Firms’ sentiments across employment size were more favorable in Q2 2012. Large-sized firms’ business confidence was the most buoyant, followed by the medium- and small-sized firms. However, for Q3 2012, the outlook of firms across employment size turned less upbeat.

Business outlook across sectors broadly improves

Across sectors, the business outlook in Q2 2012 was broadly more bullish. Firms in the construction sector were the most optimistic, followed by the services and industry sectors.  For the next quarter (Q3 2012), except for the steady outlook of the construction sector, sentiments of firms across sectors, while remaining positive, turned less favorable.

The construction sector showed heightened optimism among all sectors, registering an all-time high CI in Q2 2012. Respondents attributed their buoyant outlook to brisker business in anticipation of the stronger implementation of the planned Public-Private Partnership (PPP) projects this year. Businesses also expected other public infrastructure projects and expansion plans of the private sector to be on stream during this quarter.

The sentiment of the services sector continued to improve in the current quarter due to the more buoyant sentiment of the business activities, community and transport sub-sectors. Favorable business conditions, an upsurge in investment (both public and private), and robust consumer demand, owing in part to seasonal factors such as enrollment and tourism, were behind the more positive outlook of the sector

The industry sector attributed its more upbeat outlook to higher demand from both the domestic and overseas markets, planned business expansion, increased government infrastructure spending, stable prices of basic commodities, and the brighter growth prospects of the economy.

Meanwhile, the outlook of wholesale and retail trade firms declined slightly as business prospects of some firms were constrained by high electricity costs and stiff domestic competition.

Businesses’ outlook about their own operations is mixed

On account of the mixed outlook on business activity for Q2 and Q3 2012, firms’ confidence about their own operations across sectors did not show an improvement. Expectations of firms in the services and construction sectors remained broadly steady while those in the industry and wholesale and retail trade sectors declined.

More firms expect easier access to credit and less tight financial conditions

Financial conditions outlook turned less pessimistic as the index, while staying in the negative territory, continued to improve for the fourth consecutive quarter.  Meanwhile, firms are of the view that their liquidity requirements could be met through available credit as more respondents continued to report easier  access to credit relative to those who said otherwise compared to a quarter ago.

Employment outlook remains positive

Another indicator supporting expectations of sustained growth in 2012 was the employment outlook index for the next quarter, which remained positive although lower at 22.1 percent.

Firms with expansion plans increase

About three in every ten respondent firms in the industry sector (29.1 percent) indicated expansion plans for Q3 2012. Mining and quarrying continued to record the highest expansion plans, followed by agriculture; electricity gas and water; and manufacturing sub-sectors. The average capacity utilization for the current quarter rose to 76.2 percent, the highest reading since Q3 2008.

Competition, weak demand, and unclear economic laws: major risks to business

The top three business constraints identified by respondents in Q2 2012 were: competition, insufficient demand (leading to low sales volume), and unclear economic laws (such as unclear and inconsistent applications of tax laws, red tape, delays in approval of government licenses, unclear PPP financing guidelines, and unclear laws on fishing).

A stronger peso as well as higher inflation and interest rates are expected

Respondents that expected inflation to go up continued to outnumber those with the opposite view, but the number that said so declined in Q2 2012. This indicates that inflation expectations remained well anchored, even against expectations of strengthening prospects for domestic economic activity. For Q3 2012, the number of respondents that anticipated higher inflation increased due to expectations of higher oil prices given concerns of continuing tensions in the Middle East and pending petitions for electricity rate adjustments.

On the other hand, more respondents expected the peso to appreciate in Q2 and  Q3 2012. Expectations of the peso’s sustained appreciation could be due to anticipated strong inflows of overseas Filipinos’ remittances, business process outsourcing (BPO) receipts, and foreign investments as well as the recovery of export demand.  Meanwhile, interest rates were expected to remain broadly steady in Q2 2012 but to rise in Q3 2012. 

Survey response rate at 79.6 percent

The Q2 2012 BES was conducted during the period 2 April–11 May 2012. There were 1,587 firms surveyed nationwide. Respondents were drawn from the Securities and Exchange Commission’s Top 7,000 Corporations, as follows:  607 companies in NCR and 980 firms in AONCR, covering all   17 regions nationwide. The survey response rate for this quarter was higher at 79.6 percent (from 78.6 percent in the previous quarter). The response rates were higher for NCR at 79.6 percent (from 75.5 percent in the previous quarter) but lower for AONCR at 79.7 percent (from 80.6 percent in  Q1 2012).

A breakdown of responses by type of business showed that 16.7 percent were importers,                          7.4 percent were exporters, and 16 percent were both importers and exporters. About 59.9 percent of the respondents were neither importers nor exporters, or did not specify their firm type.

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