Business optimism on the economy was broadly steady for Q1 2017, with the overall confidence index (CI) declining slightly at 39.4 percent from 39.8 percent for Q4 2016. This means that the optimists continued to outnumber the pessimists but the margin was almost unchanged from that of a quarter ago. 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.

The current quarter's relatively steady outlook stemmed from the counterbalancing of the number of respondents that reported more positive views on the economy with those that indicated that they were negatively affected by (a) usual slowdown in business activity and moderation of consumer demand after the holiday and harvest seasons, (b) start of implementation of new business strategies for the year, (c) rising oil prices and higher cost of raw materials, and (d) wait-and-see attitude of investors with regard to the economic policy of the Trump administration, which could affect companies involved in business process outsourcing (BPOs). Likewise, sentiment of firms was tempered by expectations of a peso depreciation (which increases costs of imports) and relatively higher inflation and interest rates.

The sentiment of businesses in the Philippines mirrored the steady business outlook in France and the Euro Area. Meanwhile, a less optimistic outlook was registered by businesses in China, Hong Kong SAR, Thailand, Canada and Germany while more buoyant views were reported by those in the US, UK, South Korea and Netherlands.

For the next quarter (Q2 2017), business outlook improved, with the CI rising to 47.2 percent from 34.5 percent in the last quarter's survey. The next quarter CI suggests that economic growth could accelerate for the next quarter. Respondents cited the following factors as reasons behind their more optimistic outlook: (a) anticipated increase in demand during summer (due to the expected influx of a greater number of local and foreign tourists), enrollment and harvest periods, (b) sustained increase in orders and projects leading to higher volume of production, (c) expansion of businesses and new product lines (d) introduction of new and enhanced business strategies and processes, (e) continued infrastructure projects and government spending, and (f) confidence in the administration.

The outlook across trade groups is mixed

Among business types, domestic-oriented firms were less optimistic for Q1 2017. Meanwhile, businesses involved in international commodity trading (i.e., importers, exporters and both importer and exporter) were more upbeat.

Business confidence across sectors is also mixed

Business sentiment was also mixed across sectors for Q1 2017. The outlook of the services and wholesale and retail trade sectors for the current quarter was less favorable compared to that in the previous quarter. Meanwhile, the sentiment of the industry and construction sectors was more buoyant. For the next quarter (Q2 2017), optimism was higher in the industry, wholesale and retail trade, and services sectors, but lower in construction.

Industry firms' outlook was bullish both for the current and next quarters. Respondents' more optimistic views were driven by expectations of higher energy sales, business expansion with the opening of new branches and start of operation of new plants, and new projects for the year.

Construction firms' outlook for Q1 2017 was likewise buoyant due largely to the start of implementation of 2017 construction projects (both public and private), and innovations in equipment design and quality. However, while on-going construction activities will continue into the next quarter (Q2 2017), a lull in new projects is expected to affect businesses with the outlook of construction firms turning less optimistic.

Meanwhile, the services sector's outlook was less positive for Q1 2017 compared to the outlook a quarter ago due to the seasonal slack in demand for hotels and restaurants, real estate, and transportation services after the holiday season. Respondents also cited uncertainties over the policy direction of the new administration in the US as well as in the local front. For the next quarter (Q2 2017), the outlook of firms in the services sector was more upbeat on account of the usual uptick in demand during summer (with presence of more local and foreign tourists), new investment opportunities, increase in hiring intentions, and expectations of brisker business due to the Philippines' hosting of the Association of Southeast Asian Nations (ASEAN) Summit in April 2017.

Likewise, the outlook of firms in the wholesale and retail trade sector was less optimistic for Q1 2017 but turned more upbeat for Q2 2017. The less favorable outlook of the trade sector for the current quarter stemmed from expectations of a slack in consumer demand and business activities after the Christmas season, stiffer domestic competition emanating from the construction of new malls, and higher operational costs (due to rising oil prices and peso depreciation). Respondents attributed their optimism for the next quarter to expectations of generally more robust demand during the summer, harvest and enrollment seasons, business expansion and improvement in product lines.

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 Q1 2017 compared to that a quarter ago. The less favorable outlook of the wholesale and retail trade and services sectors weighed down the more upbeat outlook of the construction sector. Meanwhile, the outlook of industry firms about their own operations remained steady.

Employment outlook index increases

Consistent with the more optimistic view for the next quarter, the employment outlook index for the next quarter increased compared to the last quarter's survey. This suggests that more firms will continue to hire new employees than those that indicated otherwise.

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 Q2 2017 increased to 34.9 percent from 31.7 percent last quarter. Meanwhile, the average capacity utilization for Q1 2017 remained steady at 75 percent, indicating sustained volume of business activity for the current quarter.

Firms expect tight financial conditions but easy access to credit

The financial conditions index reverted to negative territory at -1.2 percent from 0.1 percent in the previous quarter. This means that firms that expected tighter financial conditions outnumbered those that said otherwise during the quarter. Nonetheless, firms were of the view that their financing requirements could be met through available credit as majority of respondents reported easy access to credit although the number that said so decreased compared to the previous survey's results.

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 government's 2 to 4 percent inflation target range for 2017 and 2018, at 2.3 percent for Q1 2017 and 2.4 percent for Q2 2017 (from 2 percent and 2.1 percent in the previous quarter's survey results, respectively).

More respondents anticipated the peso to depreciate for Q1 2017 and Q2 2017. Expectations of a weaker peso could be due to global developments such as: 1) the US Fed rate hike in December 2016 and expectations of more and faster rate increases in 2017; and 2) uncertainties emanating from the economic policy agenda of the Trump administration. Likewise, interest rates were expected to increase for Q1 and Q2 2017. The percentage of respondents that expected higher interest rates increased compared to those in the previous quarter's survey.

About the Survey

The Q1 2017 BES was conducted during the period 5 January - 15 February 2017. There were 1,500 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 2015, consisting of 588 companies in NCR and 906 firms in AONCR, covering all 17 regions nationwide. The survey response rate for this quarter was higher at 82.9 percent (from 80.7 percent in the previous quarter). The response rate was lower for NCR at 80.1 percent (from 80.2 percent in the previous quarter) and higher for AONCR at 84.8 percent (from 81 percent in Q4 2016).

Source: Bangko Sentral ng Pilipinas (BSP)