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Business Expectations Remain Optimistic in the Fourth Quarter of 2003


Business remains optimistic

Business sentiment remains optimistic in the fourth quarter of 2003 and the first quarter of 2004 as indicated by the positive diffusion indices (DI) for the overall business outlook. For these two quarters, the overall business outlook indices were recorded at 24.9 percent and 20.1 percent, respectively. 

For the fourth quarter of 2003, business expectations of respondent firms based in the National Capital Region (NCR) increased to 24.6 percent from 17.2 percent in the previous quarter, while those based outside the NCR shared the same positive business expectations with a slightly higher business outlook index of 26.8 percent.  All sectors yielded positive diffusion indices for the fourth quarter, with the highest expectations of 30.6 percent coming from the services sector.

Reasons for optimism

Respondents cited the expected increase in consumer demand during the Christmas season and the forthcoming national elections as the main factors contributing to their positive business outlook. However, the unstable political situation, high operating costs, stiff competition and the weakening of the peso were identified to negatively affect business activity.

 For the first quarter of 2004, the business outlook diffusion index remained positive although lower at 20.1 percent compared to 24.9 percent for the fourth quarter of 2003. The diffusion indices for the first quarter of 2004 declined relative to the fourth quarter of 2003, but the decline was more pronounced for firms outside NCR. However, all sectors continue to have positive business expectations, indicating a better business climate at the start of 2004.

 Respondents expect the economy to remain in the growth path, as majority of the firms projected increased business activity in the fourth quarter of 2003 and well into the first quarter of 2004. This sentiment is reflected in the volume of business activity index for respondents based in NCR, which rose to 33.7 percent in the fourth quarter and remained positive at 21.4 percent for the next quarter.  

Respondent firms outside NCR showed the same positive trend of business activity as those from the NCR, but on a less bullish level.  

Indices for business-related factors show slight deterioration. Respondent firms in the NCR anticipate a slight tightening of external financing, with the credit access index decreasing to –12.4 percent from –5.9 percent in the previous quarter.  Likewise, the financial conditions index, which is an indicator of the internal financial prospects of firms, declined slightly to -27.1 percent from    -26.6 in the previous quarter. Respondent firms outside NCR indicated the same outlook in terms of their access to credit and financial conditions.

 Estimated average capacity utilization

The estimated average capacity utilization in the industry sector for NCR firms increased slightly to 71.5 percent for the fourth quarter from 69.2 percent during the previous quarter. Respondent firms outside NCR have a slightly lower capacity utilization at 69.7 percent. Despite the presence of spare capacity in the manufacturing sector, 20 percent of the respondent firms indicated plans for expansion in the first quarter of 2004. However, NCR firms are less bullish with only 13.5 percent indicating expansion plans compared to 51.3 percent among non-NCR respondents. 

Employment index

The overall employment outlook index of –2.0 percent for the first quarter of 2004 is consistent with the expansion plans indicated by both sets of respondents.  The employment index for the NCR of –3.2 percent corresponds to the low percentage of firms planning business expansions in the area. The positive employment index of 5.4 percent for areas outside NCR is also in line with the higher percentage of firms that indicated expansion plans in these areas. 

Business performance

Confidence indicators of business performance such as volume of business activity and business conditions showed largely positive trends in the fourth quarter.  

The business confidence index for the construction sector of respondent firms within NCR is higher than that of respondent firms outside NCR. However, business confidence for the services, industry and wholesale and retail trade sectors are higher for respondent firms outside NCR than those of NCR-based firms.

 About 73 percent of respondent firms cited stiff competition while around 64 percent mentioned low demand as the major factors that constrain production and business activity in the fourth quarter. Other major factors cited by respondent firms were unclear economic laws, high interest rates, and financial problems.

Expectation of higher interest rate, higher inflation rate and stronger peso

Survey respondents anticipate a higher peso-borrowing rate in the fourth quarter as the corresponding diffusion index registered 27.2 percent. They likewise expect a relatively higher inflation rate and a stronger peso to US$ rate. The expectation of a stronger peso could be due largely to the anticipated increase in foreign exchange remittances by overseas Filipino workers during the Christmas season. Meanwhile, a higher inflation rate could be attributed to both supply and demand-side developments. On the supply side, an expected uptrend in oil prices could raise prices. On the demand side, an expected increase in consumer spending due to the holiday season and preparations for the 2004 elections could also exert inflationary pressures. The expectations for the first quarter of 2004 are generally unchanged, except for a possible slight depreciation of the peso.  

Survey period

The survey was conducted during the period covering the first week of October 2003 to the first week of November 2003.

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