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Business Optimism Continues for the Second and Third Quarters of 2004

05.21.2004

Signs optimism

Results of the second quarter 2004 Business Expectations Survey (BES) conducted during the month of April showed continued business confidence in the economy in the next two quarters of 2004. For these two quarters, the overall business outlook diffusion indices (DI) were recorded at 19.9 percent and 32.4 percent, respectively.

The overall outlook index for second quarter of 2004 remained positive but declined to 19.9 percent from 26.0 percent in the first quarter of 2004. This was due mainly to the decline in business sentiment in areas outside the National Capital Region (NCR), which went down to 29.5 percent from a high of 50.5 percent in the previous quarter. Business outlook in the NCR, however, improved slightly from 15.1 percent to 15.7 percent during the same period.

For the third quarter of 2004, the overall business outlook diffusion index increased to 32.4 percent compared to the 25.2 percent recorded in the previous quarter. The DIs for the third quarter of 2004 for the NCR respondents increased to 32.8 percent from 15.7 percent during the previous quarter, but respondents outside NCR projected a lower index of 31.6 percent compared to 46.6 percent for the same periods. The increases in the diffusion indices for the third quarter indicate that respondents expect growth to accelerate after the elections.

Reasons for optimism

While the expected increase in consumer demand contributed to the more positive business outlook in the first quarter of 2004, the growing political uncertainty on the election results dampened the business outlook for the second quarter. Business outlook of firms in areas outside NCR was affected more by political uncertainty than those in the NCR.

Expectations of accelerating growth in the economy were further confirmed as majority of the firms projected brisk volume of business in the second quarter, and more so in the third quarter of 2004, with indices of 25.4 percent and 36.4 percent, respectively. This sentiment is reflected particularly in the volume of business activity index for NCR respondents, which increased to 23.1 percent in the second quarter from 2.3 percent in the first quarter, and then accelerated to 36.4 percent in the third quarter of 2004. The corresponding index outside NCR likewise increased to 30.5 percent in the second quarter from 16.0 percent in the first quarter, then continued its momentum in the third quarter at 36.5 percent.

Mixed trend in financial conditions and access to credit

Indices for business-related factors showed some tightening of financial conditions in the NCR. More respondent firms anticipate financing problems, with the credit access index declining to -11.1 percent from –8.7 percent in the previous quarter. Likewise, the financial conditions index, which is an indicator of the internal financial prospects of firms, declined slightly to –29.6 percent from -29.2 percent in the previous quarter. In areas outside NCR, more respondent firms anticipate easier access to credit and better financial conditions compared to the previous quarter. The credit access index for non-NCR respondents improved to -22.4 percent from –24.0 percent, while the financial conditions index also increased to -35.5 percent from -40.9 percent.

Improving average capacity utilization

Consistent with positive expectations in the next two quarters, the average capacity utilization in the industry sector improved slightly to 76.7 percent for the second quarter from 76.2 percent in the previous quarter. This was due largely to the increase in capacity utilization of firms in the NCR from 73.0 percent in the first quarter to 74.2 percent in the second quarter. Meanwhile, average capacity utilization for firms outside NCR remained higher than that for NCR firms but decreased slightly to 82.4 percent from 83.2 percent for the same periods.

Only 15.6 percent of the respondent firms in the industry sector indicated plans for expansion in the third quarter of 2004. This could be due to the uncertainty of election results and the still ample spare production capacity in the sector. NCR firms however, were more optimistic with 18.3 percent indicating expansion plans compared to 12.4 percent among non-NCR respondents.

Employment index enters positive territory

The overall employment outlook index entered positive territory at 4.9 percent for the second quarter of 2004 from -2.8 percent in the previous quarter. The increase in employment index is consistent with the anticipated increase in business activity in the next two quarters. The index for NCR climbed to 3.3 percent from -7.2 percent in the previous quarter. Likewise, the index outside NCR increased to 8.3 percent in the second quarter from 7.0 percent in the first quarter.

Encouraging business performance

Consistent with the optimistic business outlook for the next two quarters, business confidence showed positive indices in the second quarter. The confidence index for the services sector was most optimistic at 17.7 percent, followed by the industry sector at 16.8 percent and the construction sector at 14.5 percent. The index for the wholesale and retail trade remained positive at 0.1 percent. The industry sector continued to show positive expectations with diffusion indices of 22.3 percent in the second quarter and 30.6 percent in the third quarter of 2004. The manufacturing sub-sector remains as the major contributor to the optimistic industry expectations, with indices at 22.9 percent in the second quarter and improving to 31.2 percent in the third quarter. The positive outlook came particularly from firms outside NCR, which recorded indices of 30.4 percent and 39.1 percent, for the second and third quarters, respectively.

The services sector maintained its optimistic outlook with overall diffusion indices of 26.7 percent and 39.6 percent in the second and third quarters of 2004, respectively. The services sector in the NCR recorded a 24.7 percent DI in the second quarter and improved considerably to 41.4 percent in the third quarter. The services sector in areas outside NCR posted a 46.6 percent DI in the second quarter but this decelerated to 20.5 percent in the next quarter. Main contributors to this optimism are firms engaged in business services with 45.6 percent and 71.0 percent diffusion indices; and hotels and restaurants with 40.0 percent and 26.1 percent diffusion indices for the second and third quarters, respectively.

Downside risks 

Around 66.8 percent of respondent firms cited stiff competition while 57.2 percent mentioned low demand as the major factors that constrain production and business activity in the second quarter. Other major factors cited by respondent firms were unclear economic laws, high interest rates, financial problems and limited access to credit.

Post-election expectations on selected economic indicators

Survey respondents anticipate a higher peso- borrowing rate in the second quarter of 2004 as the corresponding diffusion index registered 38.7 percent. They likewise expect a relatively higher inflation rate with an index of 52.0 percent and a weaker peso to US$ rate with an index of –1.5 percent. Expectations for the third quarter of 2004 likewise indicated higher interest rates and inflation rates, but respondents anticipate a strengthening of the peso with a positive diffusion index of 0.2 percent. The anticipated strengthening of the peso could be attributed to the expectations of more stable political conditions and increased economic activity after the elections.

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