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Business Outlook Very Optimistic for Q1 and Q2 of 2006


Business outlook is upbeat for the first and second quarters of 2006

Results of the first quarter 2006 Business Expectations Survey (BES) conducted by the BSP showed a very optimistic outlook for the first two quarters of 2006.  Compared with the previous survey results, the overall diffusion index (DI) in the current quarter expanded significantly to 23.4 percent from 2.8 percent. The DI increased further to 37.2 percent in the next quarter.  

The DI is computed as the percentage share of firms that answered in the affirmative less percentage share of firms that answered in the negative in a given indicator.  A positive DI indicates a favorable view, except for the average inflation rate and the average peso-borrowing rate, where a positive DI indicates the opposite.

Respondents from both the National Capital Region (NCR) and selected areas outside NCR (AONCR) were optimistic as their indices were on the uptrend. The overall diffusion  index  in  the  NCR  reversed  to  26.9  percent in the current  quarter  from  -0.8 percent in the previous survey, and accelerated further to 43.0 percent in the next quarter. Meanwhile, the diffusion index in AONCR rose to 17.3 percent in the current quarter and further to 27.5 percent in the next quarter.

Sectoral business outlook are all positive in the first two quarters of 2006

All sectors viewed that business will be better in the first two quarters of 2006.  For the current quarter, the services sector was the most upbeat with an index of 31.6 percent, up from 11.3 percent in the previous survey; followed by the industry sector at 29.6 percent from 2.0 percent; construction at 25.3 percent from -11.4 percent; and lastly the trade sector at 8.4 percent from -2.1 percent.

Reasons for improved business outlook

Respondents attributed their positive business outlook during the quarter to the following: (1) appreciation of the peso; (2) lower interest rates; (3) improved government fiscal position; (4) expectations of sales increase during summer, graduation period and school opening in June; (5) higher tourists arrivals; and (6) expected increase in export receipts during the second quarter.

Volume of business activity remains positive

The volume of business activity index for the first quarter of 2006 is lower by one percentage point at 16.0 percent from 17.0 percent in the previous survey due to the expected slowdown in consumer spending after the Christmas season. NCR respondents expected an increase in the volume of business activity with its DI improving to 20.2 percent from 17.3 percent in the previous quarter. While volume of business activity DI in AONCR during the first quarter of 2006 remains positive, the index is lower at 8.8 percent compared to 16.2 percent in the fourth quarter of 2006.

Both NCR and AONCR DIs show that volume of business is expected to increase further in the next quarter of 2006 with the opening of the school year, harvest season, and increase in tourist arrivals.

Credit access and financial conditions show considerable improvements

Although still negative, the outlook of respondent firms in the NCR on indices on credit access and financial conditions improved considerably. The same trends are observed by respondent firms in AONCR.

Capacity utilization remains stable

Albeit modestly, the overall capacity utilization in the industry sector is also expected to increase to 75.5 percent for the first quarter of 2006 from 73.5 percent in the previous quarter. Average capacity utilization for NCR firms is expected to rise to 74.7 percent in the current quarter while the average capacity utilization of firms in AONCR would remain unchanged at 76.3 percent.

Employment outlook improves in both the NCR and AONCR 

Consistent with the expected improvement in business activity in the second quarter of 2006, the overall employment outlook index yielded 14.4 percent from the previous survey’s -0.5 percent. The employment outlook index in NCR went up to 15.8 percent from 1.6 percent in the last survey. Similarly, the employment outlook index in AONCR increased significantly to 12.2 percent, a turnaround from last survey’s DI of -4.2 percent. The positive employment outlook is consistent with the expansion plans during the quarter of some firms surveyed from the industry sector.

Risks to business expansion

Respondents cited that the biggest risks which could slow down business expansion in the country are the increase in the VAT rate to 12 percent starting 1 February 2006, rise in oil prices, and continuing political noise. Other major risks to business which were ranked highly by the respondents in all sectors were stiffer competition, insufficient demand, unclear economic laws particularly on taxation, and financial problems.

Expectations on selected economic indicators

Survey respondents anticipated a stronger and stable peso, and higher inflation and domestic borrowing rates during the first two quarters of 2006.

Response rate

A total of 933 firms were surveyed: 460 companies were located in NCR and 473 firms were in areas outside NCR (45 in Region I, 115 in Region III, 135 in Region IV, 119 in Region VII and 59 in Region XI). The combined survey response rate for this quarter is 72.1 percent, an increase from 71.4 percent in the previous survey.  Response rates for NCR and AONCR were 82.0 percent (84.5 percent last quarter) and 62.6 percent (from 57.0 percent), respectively. The First Quarter 2006 BES was conducted from 2 January to 3 February 2006.

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