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Business Confidence Remains Positive in Q3 2014; Turns More Upbeat in Q4 2014

08.29.2014

Business confidence remains strong in the second half of 2014

Businesses’ outlook on the economy continued to be favorable in Q3 2014 as the overall confidence index (CI) stayed in positive territory at 34.4 percent. The current quarter reading was lower however compared to the 50.7 percent CI recorded in the Q2 2014 survey. This 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) seasonal slack in demand due to interruption of business activities during the rainy season and lower consumer spending in view of increased expenditures on education and tax payments in the previous quarter, (b) increase in prices of basic commodities and higher overhead costs such as raw materials and utilities,  (c) slowdown in business activities as a result of the truck ban and port congestion issues, and  (d) political noise brought about by the Priority Development Assistance Fund (PDAF) and Disbursement Acceleration Program (DAP) concerns.

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

For the quarter ahead (Q4 2014), business outlook turned more upbeat as the next quarter index rose to 52.9 percent from 48.9 percent in the previous quarter’s survey. This reading suggests that growth could accelerate in the last quarter of 2014.  Respondents’ more positive outlook in Q4 2014 was due to expectations of: (a) brisker business in view of the expected increase in consumer spending during the holiday season, (b) expansion in retail trade, infrastructure, power and telecommunication, education, and health care businesses, (c) higher exports of garments and metals with the recovery of global markets, and (d) increase in orders for manufacturing products leading to higher volume of production. The prevailing favorable macroeconomic conditions brought about by the steady growth of overseas Filipinos’ (OFs) remittances, increase in investment inflows as well as  the expected roll-out of major public-private partnership (PPP) projects (e.g., North-South commuter rail and subway system mass transit loop) also boosted business confidence for the next quarter.

Outlook of international trading firms is less optimistic

Exporters, dual-activity firms and importers were less optimistic in Q3 2014 as a result of the expected typical low demand during the quarter (particularly in industrial production and consumer spending) as well as the disruption in business activities caused by the truck ban and port congestion issues and higher cost of utilities. For the next quarter (Q4 2014), exporters turned more bullish on account of the expected increase in global demand as well as business expansion and new product launches for garments and information technology (IT) products, and increase in the availability of raw materials and agricultural products.  Importers’ outlook remained steady while that of dual-activity firms turned less optimistic for the next quarter.

Business confidence across sectors is less sanguine in the current quarter but turns more optimistic in the next quarter

The outlook of businesses was less favorable across sectors in Q3 2014 but was broadly more upbeat for the next quarter (Q4 2014). Construction firms’ outlook in the current quarter was less sanguine due largely to the slowdown of construction activities during the rainy season. Nonetheless, the construction sector registered the highest CI among sectors. Likewise, in view of the seasonal slack in demand and production activities in the third quarter, the outlook of the industry, services, and wholesale and retail trade sectors was less buoyant compared to a quarter ago.

For the quarter ahead (Q4 2014), businesses in the trade sector were the most optimistic in view of the expected increase in consumer demand during the Christmas and main harvest seasons. The outlook of the services sector also turned more upbeat driven primarily by the heightened optimism in the hotels and restaurant sub-sector which posted a record-high index since Q4 2007.  Meanwhile, the outlook of industry firms was steady and that of construction firms remained high albeit lower compared to the previous quarter’s survey results.

Firms are upbeat about business operations

The outlook on the volume of business activity eased in Q3 2014 but turned more buoyant for the next quarter.  Moreover, firms’ expectations of increased hiring support the more upbeat outlook on business operations for the last quarter of the year.

The number of firms with expansion plans increases and capacity utilization remains steady

The percentage of businesses with expansion plans in the industry sector increased to  34.2 percent from 30 percent in the previous quarter. Meanwhile, the average capacity utilization for the current quarter remained steady at 76.5 percent from 76.6 percent recorded a quarter ago.

Firms expect tight financial conditions but easy access to credit

Firms that expected tighter financial conditions continued to outnumber those that said otherwise. However, firms were also of the view that their financing requirements could be met through available credit as respondents who reported easy access to credit exceeded those that said otherwise, even as the number that said so declined compared to that a quarter ago.

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

Respondents who expected inflation to go up in the current and next quarters increased compared to the previous quarter’s survey results. Businesses, however, expected that the rate of increase in commodity prices is likely to remain well-anchored at 4.2 percent in both Q3 and Q4 2014. This is consistent with higher inflation expectations based on the results of the June 2014 BSP’s survey of private sector economists and the July 2014 Consensus Economics survey. Stronger inflationary pressures are expected to stem from higher-than-expected increases in food and oil prices, and increase in domestic liquidity.

Meanwhile, more respondents expected the peso to appreciate in Q3 and Q4 2014. Interest rates were also expected to increase in the current and next quarters. 

About the Survey

The Q3 2014 BES was conducted during the period 1 July–15 August 2014. There were                        1,527 firms surveyed nationwide. Respondents were drawn from the combined list of top corporations based on 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   920 firms in AONCR, covering all 17 regions nationwide. The survey response rate for this quarter was higher at 84.3 percent (from 83.9 percent in the previous quarter). The response rate was slightly higher for both NCR and AONCR at 80.9 percent and 86.6 percent, respectively (from  80.4 percent and 86.2 percent, respectively, in the previous quarter).

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