Business outlook on the economy turned less optimistic for Q3 2017, with the overall confidence index (CI) declining to 37.9 percent from 43 percent for Q2 2017. This means that the number of optimists declined but continued to be greater than the number of pessimists during the quarter. 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.

Respondents cited the following factors behind their less buoyant outlook during the third quarter: (a) seasonal factors such as slowdown of business activities during the rainy season, slack in demand during the planting and closed milling season, as well as the closed fishing season in Davao Gulf from July to September, (b) Marawi crisis and declaration of martial law in Mindanao, which affected people's mobility to and in Mindanao, (c) weakening peso, d) increasing prices, e) stiffer competition, and (f) damages and power outages caused by the July 6, 2017 earthquake in the Visayas.

The sentiment of businesses in the Philippines mirrored the less buoyant business outlook in the US, Canada, The Netherlands, New Zealand, and Thailand but was in contrast to the more bullish views of those in Germany and Hong Kong and steady outlook in France.

For the quarter ahead (Q4 2017), business outlook turned more positive as the next quarter CI rose to 51.3 percent from 42.7 percent in the previous quarter's survey results. Respondents' more positive outlook for Q4 2017 was due to expectations of: (a) uptick in consumer demand during the holiday, harvest and milling seasons, (b) continued rollout of government infrastructure and other development projects, (c) continued increase in orders and projects translating to higher volume of production, (d) expansion of businesses and new product lines, (e) introduction of new and enhanced business strategies and processes, (f) expected favorable weather condition for agricultural products, and (g) positive impact of the proposed tax reform program.

The outlook of importers and domestic-oriented firms follow the national trend

The sentiment of businesses involved in international commodity trading was broadly less favorable for Q3 2017 as importers and domestic-oriented firms expected lower consumer demand during the rainy season. Meanwhile, exporter firms' outlook was more optimistic for the current quarter. For the quarter ahead (Q4 2017), the outlook of importers and domestic-oriented firms turned more robust compared to that of the previous quarter. Meanwhile, outlook of exporters was steady and that of dual-activity firms was less favorable.

The industry sector is more confident while the construction, trade and services sectors are less positive

Business sentiment across sectors was less upbeat for Q3 2017 except for the industry sector particularly in the manufacturing sub-sector, whose views were more favorable for the current quarter. Firms' sentiment across sectors was more buoyant for Q4 2017.

Respondent firms in the manufacturing sub-sector cited improved market strategies and new product lines as reasons for their optimism, countervailing the less optimistic outlook of firms in the mining and quarrying, agriculture, fishery and forestry, and electricity, gas and water supply sub-sectors.

Meanwhile, construction firms' outlook for the current quarter was less favorable due largely to the slowdown of construction activities during the rainy season.

For the next quarter (Q4 2017), the outlook across sectors and sub-sectors were generally more buoyant due to expected high consumer demand during the Christmas season, inflow of OFW remittances, acceleration of infrastructure development projects and more investments. However, the sentiment of the mining and quarrying, and agriculture, fishery and forestry sub-sectors declined slightly for the next quarter due to lower metal prices and closed fishing season from July to September.

Firms outlook about their business operations is mixed

The outlook of firms about their own business operations remained positive albeit slightly lower for Q3 2017 compared to that a quarter ago. Industry and trade firms expected the volume of their business activities and total orders to grow at a slower rate for Q3 2017 relative to the previous quarter's survey results. In contrast, respondents in the construction and services sectors expected higher growth in their business operations for the same period. For the next quarter (Q4 2017), firms across all sectors, except industry, expected the volume of their business activities to step up.

Employment outlook improves

The employment outlook index for the next quarter improved due largely to the more positive sentiment of the services and wholesale and retail sectors offsetting the less optimistic outlook of the industry and construction sectors. This suggests that more firms will continue to hire new employees than those that indicated otherwise.

Expansion plans decreases while capacity utilization increases

The percentage of businesses with expansion plans in the industry sector for Q3 2017 decreased slightly to 32.8 percent (from 34.6 in the previous quarter). Meanwhile, the average capacity utilization for Q3 2017 was slightly higher at 76.7 percent (from 75.8 percent in Q2 2017), indicating sustained volume of business activity for the current quarter.

Firms expect tighter financial conditions but easy access to credit

The financial conditions index improved but stayed in the negative territory at -1 percent for Q3 2017 compared to -2 in the previous quarter. This means that firms that expected tighter financial conditions outnumbered those that said otherwise during the quarter but those that said so declined compared to a quarter ago. Moreover, firms were of the view that their financing requirements could be met through available credit as respondents reported easy access to credit.

Inflation is expected to remain within-target

The survey results showed that businesses anticipated inflation to increase but to remain within target, peso to depreciate, and interest rates to go up for the current and next quarters. Inflationary expectations have slightly eased as the number that said so decreased from a quarter ago. 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 3.1 percent for Q3 2017 and 3.2 percent for Q4 2017 (from 2.9 percent and 3 percent in the previous quarter's survey results, respectively).

More respondents also anticipated the peso to depreciate for Q3 2017 and Q4 2017. Meanwhile, the percentage of respondents that expected higher interest rates decreased compared to those in the previous quarter's survey.

About the Survey

The Q3 2017 BES was conducted during the period 3 July - 18 August 2017. There were 1,480 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 586 companies in NCR and 894 firms in AONCR, covering all 16 regions nationwide. The survey response rate for this quarter was lower at 83.6 percent (from 83.4 percent in the previous quarter). The response rate was lower for NCR at 80 percent (from 81.5 percent in the previous quarter) but higher for AONCR at 86 percent (compared to 84.7 percent in the previous quarter).

Source: Bangko Sentral ng Pilipinas (BSP)