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Business Confidence Declines for Q4 2016 and Q1 2017

11.25.2016

Business outlook on the economy turned less optimistic for Q4 2016, with the overall confidence index (CI) declining to 39.8 percent compared to 45.4 percent in the Q3 2016 survey. This indicates that the number of pessimists increased but remained less than that of optimists 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.

Despite the usual uptick in demand during the Christmas season, business outlook was less buoyant for the current quarter due to (a) perceived concerns over the direction of foreign policies and economic reforms in the country, (b) weakening global demand, (c) foreign exchange losses of importers due to peso depreciation, and (d) lack of supply of raw materials.

For the quarter ahead (Q1 2017), business confidence likewise weakened but continued to be positive as the next quarter index declined to 34.5 percent from 56.8 percent in the previous quarter’s survey results. Respondents attributed their less optimistic outlook for Q1 2017 to the usual slowdown in consumer demand after the holiday season. Other reasons cited by firms were the direction of foreign policies and economic reforms in the country, stiffer competition with the entry of new players in the market, and the wait-and-see attitude of investors for the coming year following the results of the US national elections, which could affect the interest rate movements in the country.

The outlook across trade groups is mixed

The outlook of businesses involved in international commodity trading (i.e., importers, exporters and both importer and exporter) was less upbeat for Q4 2016, outweighing the more bullish sentiment of domestic-oriented firms.

Business sentiment across sectors is generally less buoyant
 
Firms’ outlook in the wholesale and retail trade sector was less positive for Q4 2016. The optimism of trading firms due to the typical surge in demand in the fourth quarter was dampened by uncertainties on the direction of the government’s policies on foreign affairs and economic reforms as well as stiffer competition.

Likewise, expectation of businesses in the services sector turned less optimistic for the current quarter due to the lower confidence of firms in the business activities, community and social services, financial intermediation, and real estate sub-sectors. The views of firms from these sub-sectors were affected by concerns over the country’s foreign relations, foreign exchange losses due to peso depreciation, and the shift to the K to 12 program which reduced the usual college enrolment during the second semester. Meanwhile, transportation firms registered the highest CI across the services sub-sectors as they expect an increase in tourism activities and higher volume of passengers during the holiday season. Similarly, firms engaged in hotels and restaurants activities were more bullish largely on account of robust demand for the same period.

Firms in the industry sector also have mixed views for the current quarter. Mining and quarrying and manufacturing firms were broadly less optimistic for Q4 2016 mainly due to issues on the government’s foreign policy and economic agenda, the typical slack in demand for industrial services and equipment (e.g., steel products and fabricators) in the fourth quarter due to the holiday season. Meanwhile, firms in the agriculture, fishery and forestry and electricity, gas and water sub-sectors were bullish because of robust demand during the harvest and Christmas seasons, more favorable farming conditions with the end of El Niño, and increase in government spending.

Despite expectations of accelerated government spending on infrastructure projects, construction firms were less upbeat for Q4 2016 on account of lower income and unclear policies on the awarding of new construction projects.

For the next quarter (Q1 2017), the outlook across sectors and sub-sectors was generally less optimistic, with the usual slack in demand after the holiday season, except for the construction sector whose sentiment improved on expectations of upcoming new projects.

Firms are less upbeat about their own business operations

Consistent with the less upbeat sentiment on the macroeconomy, the outlook of firms about their own business operations weakened for Q4 2016 compared to that a quarter ago, except for the wholesale and retail trade sector whose business operations was more favorable for the current quarter.

Employment outlook index declines

The employment outlook index for the next quarter remained positive although lower compared to the last quarter’s survey. This suggests that more firms will continue to hire new employees than those that indicated otherwise, although the number of new hires could decrease compared to the previous quarter’s survey.

The number of firms with expansion plans increases while capacity utilization remains unchanged

The percentage of businesses with expansion plans in the industry sector for Q1 2017 increased to 31.7 percent from 28.1 percent last quarter. Meanwhile, the average capacity utilization for Q4 2016 remained unchanged at 74.9 percent, indicating sustained volume of business activity for the current quarter.

Firms expect easy financial conditions and access to credit

The financial conditions index was lower at 0.1 percent compared to 1.5 percent in the previous quarter. This means that firms that expected better financial conditions continued to outnumber those that said otherwise during the quarter, although the number that said so declined compared to a quarter ago. Nonetheless, firms were 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.

Inflation is expected to remain within-target

Respondents who expected inflation to go up continued to outnumber those that held the opposite view for the current and next quarters. Businesses anticipated the rate of increase in commodity prices to stay within the 2 to 4 percent BSP inflation target range for 2016 and 2017, at 2 percent for Q4 2016 and 2.1 percent for Q1 2017 (from 1.5 percent and 1.6 percent in the previous quarter’s survey results, respectively).

More respondents anticipated the peso to depreciate for Q4 2016 and Q1 2017. Expectations of a weaker peso are attributable to the views of firms that are both importers and exporters, and could be due to renewed prospects of a hike in the US Federal Reserve funds rate. Lastly, firms expected that interest rates would be higher for Q4 2016 and Q1 2017. The number of businesses that anticipated interest rates to increase remained broadly steady for Q4 2016 relative to a quarter-ago level.

About the Survey
                                                                                                                                                
The Q4 2016 BES was conducted during the period 3 October - 17 November 2016. There were 1,470 firms surveyed nationwide. Respondents were drawn from the combined list of the Securities and Exchange Commission’s Top 7,000 Corporations in 2010 and Business World’s Top 1,000 Corporations in 2014, consisting of 587 companies in NCR and 883 firms in AONCR, covering all 17 regions nationwide.  The survey response rate for this quarter was lower at 80.7 percent (from 83.8 percent in the previous quarter). The response rate was lower for both NCR at 80.2 percent (from 80.7 percent in the previous quarter) and AONCR at 81 percent (from 85.8 percent in Q3 2016).

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