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Business Expectations Rebound Strongly in the Second and Third Quarters of 2003

05.23.2003

Business expectations strongly rebounded for the second quarter of 2003 as the overall business outlook diffusion index (DI) turned positive at 4.0 percent from -3.0 percent during the first quarter of the year. In the survey conducted during the period April up to early May 2003, respondents cited the speedy resolution of the US-led war in Iraq, the recent strengthening of the peso, and the downtrend in oil prices as main reasons for this positive outlook.

The shift to a positive index was largely traced to the improved sentiment in the industry, wholesale and retail trade and the other services sectors, which yielded positive diffusion indices for the second quarter.  Only the construction sector recorded a negative outlook during the period.

 Meanwhile, business prospects for the third quarter of 2003 turned more bullish as the overall business outlook index increased to positive 27.6 percent, from 17.4 percent reported in the second quarter of the year.  All sectors of the economy surveyed showed positive business outlooks for the period. Respondents attributed their optimism to the increase in orders from USA, Europe and Asia, and to the increase in domestic demand in anticipation of the opening of the school year. These positive factors were, however, dampened by concerns over the possible adverse effect of the Severe Acute Respiratory Syndrome (SARS) to their businesses.

 Respondents expect the economy to track along the growth path, with majority of the firms projecting higher volume of business activity in the third quarter. This sentiment is reflected in the volume of business activity index, which rose to 31.0 percent in the third quarter from 28.8 percent in the previous quarter.

 Respondent firms are anticipating better access to external financing with the credit access index improving to –12.5 percent from –17.9 percent in the previous quarter. Although still negative, this is the highest value reached by the index in the last nine quarters. In addition, the financial conditions index, which is an indicator of the internal financial standing of firms also improved to    –34.8 percent   from –46.3 percent in the previous quarter.

 The estimated average capacity utilization in the industry sector estimated from BES sample of industrial firms based in Metro Manila remains broadly stable at 69.1 percent in the current quarter from 69.4 percent in the previous quarter.[1] While majority of the respondents still do not have business expansion plans, indicative of the remaining excess capacity in the industry sector, 22.6 percent of the firms indicated plans to expand their businesses in the third quarter compared to 24.3 percent in the previous quarter.

 Despite some expansion in economic activity that is expected during the third quarter of the year, the employment outlook index for the same period continued to weaken at -6.3 percent from -4.6 percent in the previous quarter, indicating that majority of the respondent firms have no plans to hire additional staff during the period. This confirms that excess capacity is still present in the economy.

 Confidence indicators of business performance showed mixed trends. The confidence index for the industry sector remained positive but declined to 6.8 percent from 8.0 percent in the previous quarter. On the other hand, the confidence indices for both services and trade sectors increased to 9.0 percent and 6.0 percent, respectively, in the second quarter from negative indices in the first quarter. For the construction sector, the confidence index declined to -5.9 percent from 0.0 percent in the previous quarter.

 Despite the generally positive tendency of business confidence, a number of factors were cited by the respondents, which could pose downside risks to production and business activity in the second quarter. More than 70 percent of the respondent firms cited stiff competition and low demand as the major sources of downside risks to business activity. Moreover, around one-third of respondent firms cited unclear economic laws, high interest rates, and financial problems as sources of concerns.

 Survey respondents continue to anticipate higher peso borrowing rates in the second quarter as the corresponding diffusion index increased to 26.5 percent from 15.9 percent in the previous quarter. However, they expect a lower inflation rate as the diffusion index decreased to 25.8 percent from 36.7 percent in the previous quarter. Respondents also expect a stronger peso as the current quarter average peso/US$ rate diffusion index decreased to 6.9 percent from 11.3 percent in the previous quarter. The expectation of a stronger peso could be due to the anticipation of a lower inflation rate, a downtrend in oil prices and the speedy resolution of the US-led Iraq war.

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[1] These figures are lower compared to the National Statistics Office’s (NSO) average capacity utilization figures of 76.3 percent from January to February 2003, which were computed based on a sample of large manufacturing firms nationwide.

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