Business outlook on the economy turned less optimistic for Q3 2019, with the overall confidence index (CI) falling to 37.3 percent from 40.5 percent in Q2 2019. Respondents attributed their weaker sentiment for Q3 2019 to: (a) seasonal factors such as slack in the demand and slowdown of business activities during the rainy season, (b) decline in orders leading to lower sales, (c) lack of supply of raw materials, (d) perceived unfavorable effects of various government policies (i.e., rice tariffication law, banning of provincial buses on EDSA) and (e) stiffer competition.

The lower but positive CI means that the number of optimists declined but continued to be greater than the number of pessimists for Q3 2019. 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 sentiment of businesses in the Philippines mirrored the less buoyant business outlook in Bulgaria, Croatia, Germany, India and Norway. However, business sentiments in Australia, Brazil, Canada, Chile, France, Greece, Hungary, Israel and Ukraine were more optimistic.

For Q4 2019, business outlook turned more upbeat as the CI rose to 56.1 percent from the Q2 2019 survey result of 47.6 percent in Q3 2019. This was the highest next quarter CI since Q4 2016. Respondents' more positive outlook for Q4 2019 was due to expectations of: (a) higher consumer demand during the holiday and harvest seasons, (b) continued increases in orders and projects, (c) more favorable macroeconomic conditions (i.e., lower inflation, stable exchange rate and lower interest rate), (d) higher government spending/infrastructure and (e) business expansion.

The outlook of trading firms is generally less upbeat for Q3 2019

Across different types of trading firms (i.e., exporter, importer, dual-activity and domestic-oriented), business sentiment for Q3 2019 was less positive as respondent firms were affected largely by seasonal slack in consumer demand during the quarter.

For Q4 2019, the outlook of importers and domestic-oriented firms was more buoyant on expectations of higher domestic demand during the holiday season and stronger inflows of OF remittances and more favorable macroeconomic conditions. However, exporters and dual-activity firms' outlook was partly weighed down by expectations of lower demand for manufacturing of industrial products (i.e., electronics and semiconductor products).

Business sentiment across sectors is generally less positive across sectors for Q3 2019

For Q3 2019, business sentiment was less optimistic across sectors, except for the services sector, which was more upbeat. Aside from the sluggish demand during the rainy season, the foreseen negative effect of rice tarrification law was also part of the reasons cited by the respondents for their less buoyant outlook.

Outlook of construction firms was the least buoyant among the three sub-sectors due to their uncertainty caused by the US-China Trade War and perceived bureaucracy and corruption in the government. Industry firms' outlook was less buoyant for Q3 2019, as the CIs of firms from mining and quarrying, manufacturing and utilities sub-sectors turned less positive. Respondents attributed their less optimistic outlook to the seasonal slack in demand during the rainy season, limited operations due to the repairs of machineries and lack of government support to mining activities. The less optimistic outlook of the wholesale and retail trade sector for Q3 2019 was due to seasonal slack in demand during the rainy season, stiffer competition and open rice importation. Meanwhile, sentiment of firms in the services sector was more upbeat for Q3 2019. The more optimistic views emanated from the community and social services, financial intermediaries, real estate and transportation sub-sectors. The views of firms from these sub-sectors stemmed from their expectations of a resumption in government spending, following the delay in the passage of the 2019 National Government budget. Further, firms that are involved in patient care expect higher incomes in Q3 2019 amid the dengue epidemic.

Firms are less optimistic about their business operations for Q3 2019

The outlook of firms about their own business operations remained positive albeit lower for Q3 2019 compared to their sentiment in Q2 2019. The sentiment of firms on the volume of business activity was less upbeat across sectors. Meanwhile, the outlook on the volume of total orders booked of the respondent firms was less optimistic across all sectors, except for the services sector, which was broadly steady. For Q4 2019, the outlook on volume of business activity was mixed across sectors, i.e., more bullish for the wholesale and retail trade sector, broadly steady for the industry and services sectors, but less upbeat for the construction sector.

Employment outlook remains positive

The employment outlook index for Q4 2019 remained positive although lower (at 19.6 percent) compared to the Q2 2019 survey result for Q3 2019 (at 26 percent). This suggests that more firms will continue to hire new employees, although the number that said so are lower compared to the Q2 2019 survey result.

Expansion plans are lower, while capacity utilization increases

The percentage of businesses with expansion plans in the industry sector for Q4 2019 was lower at 30.4 percent from the Q2 2019 survey result at 33.5 percent for Q3 2019. However, the average capacity utilization (in the industry and construction sectors) for Q3 2019 was higher at 76.1 percent from 75.5 percent for Q2 2019.

Firms expect easy access to credit but tighter financial conditions

Sentiment on financial conditions, which is already in negative territory, slipped further to -7 percent for Q3 2019, compared to -5.8 percent in Q2 2019. This means that firms that expect tight financial conditions increased and outnumbered those that said otherwise for Q3 2019. However, firms were of the view that their financing requirements could be met through available credit as more respondents reported ease of access to credit.

Firms expect a stronger peso and lower inflation and higher interest rates for Q3 2019

The survey results showed that businesses expect the peso to appreciate, but inflation and interest rates to decrease for Q3 2019. Meanwhile, respondents anticipate the peso to appreciate, inflation to rise, but interest rates to decrease for Q4 2019. Businesses expect that the rate of increase in commodity prices will remain within the government's 2 to 4 percent inflation target range for 2019. These are 3.4 percent for Q3 2019 and 3.5 percent for Q4 2019 from the Q2 2019 survey results of 3.9 percent and 4 percent, respectively. Moreover, businesses anticipate that the peso will average at Php 51.8 for Q3 2019 and Php 51.7 for Q4 2019.

About the Survey

The Q3 2019 BES was conducted during the period 10 July � 10 September 2019. There were 1,487 firms surveyed nationwide. Respondents were drawn from the combined list of the Securities and Exchange Commission's (SEC) Top 7,000 Corporations in 2010 and Business World's Top 1,000 Corporations in 2017, consisting of 583 companies in NCR and 904 firms in AONCR, covering all 16 regions nationwide. The survey response rate for Q3 2019 was slightly lower at 81.7 percent from 81.9 percent in Q2 2019. The response rates were lower for NCR at 80.4 percent from 81.2 percent in Q2 2019 but slightly higher for AONCR at 82.5 percent from 82.4 percent in Q2 2019.

Source: Bangko Sentral ng Pilipinas (BSP)