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Business Confidence Rises in Q2 2014 on Stronger Domestic and Global Demand

05.23.2014

Business sentiment improves in Q2 2014

Businesses’ outlook on the economy was more bullish in Q2 2014 as the overall confidence index (CI) rose to 50.7 percent from 37.8 percent in the Q1 2014 survey. This higher reading indicates that the number of optimists increased and continued to be greater than the 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 cited the following factors for their more upbeat outlook: (a) robust consumer demand during the secondary harvest season, graduation and enrollment periods, and summer season (with the influx of both local and foreign tourists), (b) new construction projects (public and private) boosted by rehabilitation efforts (from Typhoon Yolanda) and stepped-up infrastructure projects,   (c) increase in orders and new contracts/projects leading to higher volume of production,  (d) expansion of businesses, launch of new product lines and rise in investments with the recovery of the US and other export markets, and (e) continuing confidence in the administration. The country’s strong macroeconomic fundamentals such as manageable inflation and steady growth of remittances as well as more favorable external conditions with the recovery of global markets support the positive business outlook.

The sentiment of businesses in the Philippines mirrored the  buoyant business outlook in the US, UK, Canada, Germany, Hong Kong, Singapore and South Korea but was in contrast to the less bullish views of those in China, New Zealand and India.

For the next quarter (Q3 2014), businesses anticipated continuing economic expansion as the next quarter CI sustained its high level of 48.9 percent, although lower than 50.8 percent in the previous survey. This is due in part to the more optimistic outlook of firms in the wholesale and retail trade and construction sectors given their expectations of brisker demand at the start of the school year and new expansion projects in power generation, telecommunications and building of highways. However, optimism was dampened by expectations of firms engaged in manufacturing and hotel and restaurant services of slack in demand during the rainy season.

Outlook of trading firms is optimistic

The outlook of businesses involved in international commodity trading turned more favorable in    Q2 2014. Among business types, dual-activity firms were the most optimistic, posting a record-high CI of 54.4 percent.  Importers expected that growth would be driven by higher consumer demand during the summer and enrollment period.  Meanwhile, the improved optimism of exporters could signal an expected strengthening of demand with the recovery of global markets.  For Q3 2014, the outlook across business types was less favorable, although remaining positive, due to expectations of slack in demand during the rainy season.

Business confidence is high across sectors

Across sectors, the business outlook in Q2 2014 was more bullish. Firms in the construction sector were the most optimistic, followed by the services, wholesale and retail trade and industry sectors. 

The construction sector was the most optimistic among all sectors in the current quarter, with the CI matching the all-time-high confidence level of 60.2 percent recorded in Q2 2013. Firms belonging to this sector expected that the expansion of construction services would be sustained, particularly as more public infrastructure projects were started during the quarter. The services sector was likewise more upbeat in the current quarter, generally on account of the expected better economic and investment prospects in the country. Among its sub-sectors, real estate posted the highest confidence index, while the outlook of the transportation sub-sector was the most improved among sub-sectors. The sanguine outlook of the wholesale and retail trade and industry sectors stemmed from respondents’ expectations of a surge in consumer demand and business activity in the domestic and international markets. Respondents in the industry sector attributed their optimism to the favorable weather conditions, the onset of the fishing season, and expected increase in electricity consumption during the summer.

For the next quarter (Q3 2014), the outlook was mixed as firms in the construction and wholesale and retail trade sectors were more optimistic while those in the services and industry sectors were less upbeat.

Firms are upbeat about business operations

Consistent with the favorable overall outlook on the macroeconomy, the outlook of firms on business operations improved in Q2 2014. Notably, the outlook of firms engaged in the agriculture, fishery and forestry and mining sub-sectors was the most robust among those in the industry sector, while the more positive sentiment in the services sector was driven by the financial intermediation, business activities and real estate sub-sectors.

Firms expect better financial conditions and easy access to credit

Firms that expected tighter financial conditions continued to outnumber those that said otherwise but the number that said so declined relative to that in the previous quarter. Firms were also of the view that their financing requirements could be met through available credit as more respondents continued to report easy access to credit compared to those that said otherwise. The credit access index rose to its second highest level in Q2 2014.

The number of firms with expansion plans declines but average capacity utilization increases

The percentage of businesses with expansion plans in the industry sector remained positive although lower at 30 percent from 32.9 percent last quarter. Meanwhile, the average capacity utilization for the current quarter increased to 76.6 percent from 75.2 percent registered a quarter ago.

Inflation is expected to be within the 3-5 percent target range

Respondents who expected inflation to go up continued to outnumber those that held the opposite view in the current and next quarters, but the number that said so declined relative to the previous quarter. Businesses expected that the rate of increase in commodity prices is likely to remain well-anchored at 4 percent in Q2 2014 and 4.1 percent in Q3 2014. This is consistent with inflation expectations based on the BSP’s survey of private sector economists, which also showed within-target inflation forecasts for 2014-2015. Stronger inflationary pressures are expected to stem from higher-than-expected increases in utility rates and weather-related increase in food prices.

Meanwhile, more respondents expected the peso to appreciate in Q2 and Q3 2014. Their views were driven by the anticipation of sustained inflows of foreign exchange from overseas Filipino remittances, foreign portfolio and direct investments, and merchandise exports. Interest rates were also expected to increase in the current and next quarters as respondents that expected higher interest rates continued to outnumber those that said otherwise.

About the Survey

The Q2 2014 BES was conducted during the period 1 April – 14 May 2014. There were  1,529 firms surveyed nationwide. Respondents were drawn from the combined top corporations based on the list of the Securities and Exchange Commission’s Top 7,000 Corporations in 2010 and Business World’s Top 1000 Corporations in 2012, consisting of 607 companies in NCR and 922 firms in AONCR, covering all 17 regions nationwide. The survey response rate for this quarter was broadly steady at 83.9 percent (from 83.1 percent in the previous quarter). The response rate was steady for NCR at 80.4 percent (from 80.2 percent in the previous quarter) and higher for AONCR at   86.2 percent (from 85 percent in Q1 2014).

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