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Business Outlook Remains Bullish in Q3 2013; Enthusiasm Rises Sharply for Q4 2013


Business confidence registers a record high in Q4 2013

Businesses’ outlook on the economy continued to be favorable in Q3 2013. It was however less upbeat, with the overall confidence index (CI) lower at 42.8 percent compared to the all-time high of 54.9 percent recorded in the Q2 2013 survey. The lower but positive CI indicates that the number of optimists declined but continued to be greater than the number of pessimists during the quarter.  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.

Respondents attributed their less buoyant outlook to expectations of: (a) lower seasonal demand during the quarter (i.e., slowdown in demand from a high base in the last quarter, interruption in business activities during the rainy season), (b) stiffer competition, particularly from products from China, and (c) volatility in the movements of the peso.  Uncertainties in the global economy such as the impact of the anticipated exit from quantitative easing in the US also contributed to their lower optimism.

The sentiment of businesses in the Philippines mirrored the weaker outlook in Hong Kong SAR, South Korea and India but was in contrast to the more favorable sentiment of businesses in the US, UK, Canada, Germany and New Zealand.

For the quarter ahead (Q4 2013), the business outlook turned more bullish as the next quarter index rose to an all-time high of 60 percent since the nationwide survey started in Q4 2006. This reading suggests that the growth momentum could accelerate in the last quarter of 2013.  Respondents’ more positive outlook in Q4 2013 was due to expectations of: (a) brisker business during the Christmas season, (b) the continued increase in orders and projects leading to higher volume of production, and (c) expansion of businesses and new product lines. The prevailing favorable macroeconomic conditions such as low interest rates, manageable inflation, steady growth of overseas Filipinos’ (OFs) remittances, increase in investment inflows as well as the recent investment-grade credit rating from three rating agencies, namely, Fitch Ratings, Standard and Poor’s and Japan Credit Rating Agency also boosted business confidence for the next quarter.

Outlook of respondents from both NCR and AONCR tracks the overall trend

Tracking the national trend, the sentiment of businesses in both the National Capital Region (NCR) and Areas Outside the NCR (AONCR) was less sanguine in Q3 2013. However, for the next quarter (Q4 2013), the businesses’ outlook in NCR rose to an all-time high while that of AONCR firms edged higher.

Importers’ optimism rises

Importers were less optimistic in Q3 2013 as a result of lower seasonal demand and the volatility of the peso but they turned more bullish in Q4 2013 on account of the expected increase in consumer demand during the Christmas season and the forthcoming barangay elections, continuous business expansion and new product launches, and sustained growth in the construction sector (both private and public). Meanwhile, exporters and dual-activity firms were less confident in Q3 and Q4 2013, largely as a result of concerns over the global economy, decrease in demand with the sluggish recovery of exports markets, tighter competition, lower farm production, and volatile metal prices.

Small- and medium-sized firms turn more upbeat
Similarly, firms’ sentiments across employment size were less favorable in Q3 2013. For Q4 2013, the outlook of small- and medium-sized firms turned more upbeat. However, the optimism of large-sized firms continued to decline in the next quarter.

Business confidence improves across sectors

The services sector recorded the most bullish outlook for Q3 2013. Among its sub-sectors, financial services remained the most optimistic for the seventh consecutive quarter. Despite the lower CI for the services sector, the outlook of the transportation and community and social services sub-sectors was more buoyant in the current quarter. For Q4 2013, the more upbeat outlook of the services sector was primarily driven by heightened optimism in the hotels and restaurant sub-sector, followed by the financial intermediation, real estate, transportation and business activities sub-sectors. This is in view of expectations of brisker business activity during the holiday season, the improvement/launch of new product lines, stable macroeconomic conditions, and expected rise in investments following the investment-grade credit ratings for the Philippines.

Construction firms’ outlook in the current quarter was less sanguine due largely to the slowdown of construction activities during the rainy season. However, firms continued to expect that the expansion of construction services would accelerate in the last quarter of the year.

Due to the seasonal slack in demand in the third quarter, the outlook of the wholesale and retail trade sector was less bullish from a quarter ago. However, in the quarter ahead (Q4 2013), businesses in the trade sector posted an all-time high CI of 66.9 percent on account of the expected increase in consumer demand during the Christmas and harvest seasons. Consumption is anticipated to be propped up by a sound investment climate and the steady growth of OF remittances.

Likewise, industry firms were less optimistic in Q3 2013 largely due to seasonal factors, stiff competition and volatile metal prices. For Q4 2013, businesses in the industry sector turned more optimistic as they expect full recovery of agriculture from past typhoons and an increase in the supply of raw materials inputs for industrial production. Firms were also of the view that aggressive marketing strategies are expected to result in higher market shares globally.

Businesses have mixed views about their own operations

With respect to the outlook on their own operations during the current quarter, businesses across sectors held different views. The sentiment of firms turned more bullish in the services and wholesale and retail trade sectors but was less optimistic in the construction and industry sectors.

Firms expect easier access to credit but tighter financial conditions

Firms were of the view that their liquidity requirements could be met through available credit as more respondents continued to report easy access to credit compared to those that said otherwise. However, firms that expected tighter financial conditions outnumbered those that said otherwise as the financial conditions index reverted to negative territory at -1.9 percent in Q3 2013.

Employment outlook improves

The employment outlook index for the next quarter jumped to 31.7 percent from 24.1 percent last quarter. By sector, firms in the construction sector were the most optimistic in their employment outlook in Q4 2013. The employment outlook of firms in the services and wholesale and retail trade sectors was likewise upbeat, while that of industry remained steady.

Number of firms with expansion plans increases

In line with the more favorable business sentiment of the industry sector for the next quarter, the percentage of businesses with expansion plans increased to 32.1 percent (from 28.7 percent). Meanwhile, the average capacity utilization for the current quarter slightly improved to 74.9 percent from 74 percent registered a quarter ago.

Competition and weak demand remain to be the major challenges to business

The top business constraints identified by respondents in Q3 2013 continued to be domestic competition (cited by about three-fifths of the total number of respondents) and insufficient demand (leading to low sales volume).

Expectations on inflation increase while those on the exchange rate and interest rate are mixed

Even as respondents who expected inflation to go up outnumbered those that held the opposite view in the current and next quarters, businesses anticipated that inflation would settle at the lower end of the inflation target—at 3.2 percent in Q3 2013 and 3.3 percent in Q4 2013. Stronger inflationary pressures, however, could emanate from the recent hike in international crude oil prices due to the ongoing political turmoil in the Middle East, the depreciation of the peso in the first two months of Q3 2013, the expected increase in utility rates and the impact of sustained growth in liquidity.

More respondents expected the peso to depreciate in Q3 2013 but to appreciate in Q4 2013. Meanwhile, respondents that expected lower interest rates continued to outnumber those that said otherwise in the current quarter even as the former declined significantly in number compared to the previous quarter. For the next quarter, more respondents expected interest rates to increase.

Survey response rate is higher at 83.4 percent

The Q3 2013 BES was conducted during the period 1 July–13 August 2013. There were 1,552 firms surveyed nationwide. Respondents were drawn from the Securities and Exchange Commission’s Top 7,000 Corporations in 2010, consisting of: 606 companies in NCR and 946 firms in AONCR, covering all 17 regions nationwide. The survey response rate for this quarter was higher at 83.4 percent (from 83 percent in the previous quarter). The response rate was higher for both NCR at 82.2 percent (from 81.7 percent in the previous quarter) and AONCR at 84.1 percent (from 83.8 percent in Q2 2013).

A breakdown of responses by type of business showed that 15.1 percent were importers, 6.5 percent were exporters, and 17.9 percent were both importers and exporters. About 60.6 percent of the respondents were neither importers nor exporters, or did not specify their firm type.

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