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Business Expectations Turn Optimistic for the Second Quarter of 2003 From a More Cautious Stance in the First Quarter

02.23.2003

Business sentiment turned more cautious for the first quarter of 2003 as the overall business outlook diffusion index declined to negative 3.0 percent from 16.2 percent during the fourth quarter of last year. The survey, which was conducted by the BSP in January 2003, showed that for the first time since the third quarter of 2001, the diffusion index became negative. The shift to a negative index was traced mainly to the industry and construction sectors, which both yielded negative diffusion indices for the first quarter. The wholesale and retail trade and the other services sectors continued to have positive outlook during the period. The respondents attributed the cautious business stance primarily to the increasing threat of war between a US-led coalition and Iraq and the corresponding rise in oil prices.

Business prospects for the second quarter of 2003 are seen to be brighter as the overall business outlook index increased to positive 17.5 percent, from 6.3 percent recorded in the first quarter of the year. Respondents expect the economy to remain in the growth path, with majority of the firms projecting higher volume of business activity in the second quarter in anticipation of an increase in consumer demand during the summer season and the opening of classes in June. All sectors of the economy registered positive business outlook for the second quarter. Moreover, firms expect more business expansion activity with 24.3 percent of respondent firms indicating that they have plans to expand their businesses in the second quarter of 2003 compared to only 18.7 percent in the previous quarter.

As some expansion in economic activity is expected during the second quarter of 2003, the employment outlook index for the same quarter shows some improvement although it remained weak at –4.7 percent. This indicates that majority of the respondent firms have no plans to hire additional staff during the period.

Confidence indicators of business performance showed mixed trends. The wholesale and retail trade sector index slightly recovered at -0.8 percent from –7.0 percent posted in the last quarter. Meanwhile, the confidence index for the industry sector declined but remained positive at 8.0 percent from 14.2 percent in the previous quarter. Likewise, the confidence index for services declined to –5.1 percent from 8.3 percent, and the construction sector index, to 0.0 percent from 3.3 percent.

According to about 70 percent of the respondent firms, stiff competition and insufficient demand remain the primary factors that limit production and business activity in the first quarter. Other factors cited by around one-third of respondent firms include unclear economic laws, high interest rates, financial problems, access to credit, and labor problems.

The increasing prospect of war between a US-led coalition and Iraq, rising oil prices, the weakening of the peso and the growing fiscal deficit could have led survey respondents to be less optimistic on the peso borrowing rate, prices and the peso-dollar rate for the first and second quarters of 2003.
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1  Starting the second quarter of 2001, the BSP has conducted the BES using the harmonized set of core questions for Asian countries suggested by ADB under its RETA 5938 program. The survey covers 12 major industry groups (grouped into 4 major economic sectors), with firms drawn from the top 3,000 corporations in Metro Manila as listed by the Securities and Exchange Commission (SEC). The first quarter survey, which was conducted in January 2003 with 294 respondent firms, had a 65 percent response rate.

2   The Index is computed as follows: (1) for the “business outlook” variable: percentage share of firms that have an “improving” outlook less percentage share of firms that have a “deteriorating” outlook; (2) for the other business variables: percentage share of firms that answered that a given indicator would go “up” less percentage share of firms that answered that a given indicator would go “down”. With respect to these business variables, a positive index indicates a favorable view, except for the average inflation rate, the average peso-dollar rate, and the average peso-borrowing rate where a positive index indicates the opposite.

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