Business outlook on the economy for Q1 2018 turned less optimistic while remaining positive, with the overall confidence index (CI) declining to 39.5 percent from 43.3 percent for Q4 2017. This indicates 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.

According to respondents, their less upbeat quarter-on-quarter outlook was due primarily to the following factors: (a) usual slowdown in business activity and moderation of consumer demand after the holiday and harvest seasons, (b) rising fuel prices that are largely influenced by higher international prices of crude oil and the increase in excise tax on petroleum products, and (c) stiffer competition. Likewise, concerns cited by respondent firms over the transitory impact on consumer prices with the implementation of the Tax Reform for Acceleration and Inclusion (TRAIN) Law may have contributed to the lower outlook, although a significant number of businesses surveyed also mentioned about the positive impact of the tax reform.

The sentiment of businesses in the Philippines mirrored the less favorable business outlook in the US, Canada, China, Hong Kong and South Korea, but was in contrast to the more bullish views of those in the UK, Australia, France, Germany, Netherlands and Thailand.

For the next quarter (Q2 2018), business sentiment improved, with the CI rising to 47.8 percent from 39.7 percent in the last quarter's survey. This suggests that economic growth could accelerate for the next quarter. Respondents cited the following factors as reasons behind their more optimistic outlook: (a) usual increase in demand during summer (in view of the foreseen increase in the number of local and foreign tourists), enrolment and harvest periods, as well as the anticipated higher levels of household disposable income as the TRAIN Law takes into effect, (b) expected increase in government infrastructure spending with the Build, Build, Build strategy of the administration and higher tax revenues due to the TRAIN Law, (c) expansion of businesses, new projects and investment opportunities, and (d) continued product development, new product lines, and enhanced marketing strategies.

Outlook across trade groups is mixed

The sentiment of businesses across trading types was mixed for Q1 2018. The outlook of exporters, importers and domestic-oriented firms was less favorable for Q1 2018. Meanwhile, the outlook of dual-activity (both importer and exporter) firms was more optimistic. For the quarter ahead (Q2 2018), the outlook of firms across trade groups improved.

The decline in business sentiment for Q1 2018 is attributable largely to the wholesale and retail trade sector

Business sentiment across sectors was mixed for Q1 2018. The outlook of the industry and construction sectors was more buoyant compared to that in the previous quarter. Meanwhile, the sentiment of the services sector was steady for the current quarter, while those of the wholesale and retail trade sector was less favorable.

Industry firms' bullish outlook was on account of expectations of increasing demand, improvement in production capacity, new product lines, enhanced marketing strategies, and increase in households' disposable incomes attributable to the TRAIN Law. Industry firms were also looking forward to more favorable business conditions in both the domestic and external markets, and sustained foreign investment inflows.

The more upbeat outlook of construction firms was due mainly to expectations of new construction projects (both public and private) to be awarded in 2018.

The services sector's outlook was steady compared to the outlook a quarter ago as the more positive sentiment of the financial intermediation, business activities, and community and social services sub-sectors offset the less favorable views of the real estate and hotels and restaurants sub-sectors. The steady outlook was also in view of the unchanged sentiment of some respondents on the economy and on business plans and operations as they await the effects of the implementation of the TRAIN Law.

Meanwhile, the less favorable outlook of the trade sector stemmed from expectations of a slack in consumer demand and business activities after the Christmas season, higher fuel costs, and initial increase in prices due to the implementation of the TRAIN Law.

For the next quarter (Q2 2018), optimism was higher in the industry, wholesale and retail trade, and services sectors, but lower in construction.

Firms are less upbeat about their own business operations

The outlook of firms about their own business operations turned less positive for Q1 2018 compared to that a quarter ago. The sectoral outlook of firms on the volume of business activity and total orders booked was consistent with those at the national level�more bullish for the industry and construction sectors but less upbeat for the wholesale and retail trade and services sectors.

Employment outlook improves

The employment outlook index for the next quarter increased to 29.9 percent from 24.7 percent in the last quarter's survey. This indicates that the number of firms with hiring intentions increased relative to a quarter ago.

Expansion plans improve while capacity utilization decreases

Likewise, the percentage of businesses with expansion plans in the industry sector for Q2 2018 increased to 35.1 percent from 31.1 percent in the previous quarter. Meanwhile, the average capacity utilization (in the industry and construction sectors) for Q1 2018 was lower at 74.3 percent (from 76 percent in Q4 2017).

Firms expect tighter financial conditions and easy access to credit

The financial conditions index remained in negative territory at -4.6 percent for Q1 2018 from -0.9 percent in the previous quarter. This means that firms that expected tighter financial conditions increased and continued to outnumber those that said otherwise. However, 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. Respondents who expected inflation to go up continued to outnumber those who held the opposite view for the current and next quarters. The number of respondents with views of higher inflation increased for both Q1 and Q2 2018 relative to the previous quarter's survey results. Businesses anticipated the rate of increase in prices of consumer goods and services to stay within the government's 2 to 4 percent inflation target range for 2018, at 3.4 percent for Q1 2018 and 3.5 percent for Q2 2018 (albeit higher from the previous quarter's survey results).

About the Survey

The Q1 2018 BES was conducted during the period 8 January � 22 February 2018. There were 1,469 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 584 companies in NCR and 885 firms in AONCR, covering all 16 regions nationwide. The survey response rate for this quarter was lower at 82.3 percent (from 84 percent in the previous quarter). The response rate was lower for both NCR at 80 percent (from 80.3 percent in the previous quarter) and AONCR at 83.8 percent (compared to 86.4 percent in the previous quarter).

Source: Bangko Sentral ng Pilipinas (BSP)