Business Confidence Rises for Q4 2017 Supported by Strong Domestic and External Demand


Business outlook on the economy turned more upbeat for Q4 2017, with the overall confidence index (CI) rising to 43.3 percent from 37.9 percent for Q3 2017. This means that the number of optimists increased and continued to be greater than the number of pessimists during the quarter. This quarter's confidence level is also higher compared to its year-ago level. 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 more buoyant outlook during the fourth quarter: (a) expected increase in orders and consumer purchases during the Christmas holidays, (b) increasing number and expansion of businesses, (c) higher disbursements for the government's infrastructure and other development projects, (d) favorable macroeconomic conditions in the country, particularly manageable inflation and low interest rates, and (e) expansion of export markets and stronger demand for Philippine products.

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

For the quarter ahead (Q1 2018), business outlook turned less optimistic, with the next quarter CI declining to 39.7 percent from 51.3 percent in the previous quarter's survey results. Respondents attributed their less positive outlook mainly to the usual slowdown of demand after the holiday season. Other reasons cited by firms were lag in business transactions at the beginning of the year (e.g., delay in renewal of contracts and drydock season for the shipping industry), stiffer business competition, concerns on the effect of the new excise tax rates to the automobile industry, and higher inflation.

The outlook of exporters stayed at record-high

The sentiment of businesses across trading types was mixed for Q4 2017. Among business types, exporters were the most bullish, maintaining a record-high confidence level for the second consecutive quarter (at 50 percent). Likewise, domestic-oriented firms as well as importers were more optimistic. However, the outlook of dual-activity firms was less upbeat. For the quarter ahead (Q1 2018), the sentiment across different types of businesses was less optimistic.

The services and wholesale and retail trade sectors are more confident while industry and construction are less positive

Business sentiment across sectors was also mixed for Q4 2017. Business confidence was highest in the services sector, followed by wholesale and retail trade while those in the industry and construction sectors were less favorable. Firms' sentiment across sectors was less optimistic for Q1 2018 due largely to the usual slack in demand after the holiday season, except that for the construction sector which turned bullish.

Sentiment was high across the services sub-sectors, with hotels and restaurants posting the highest confidence index, reaching a two-year record-high at 73 percent. The positive sentiment of the wholesale and retail trade firms was driven by expectations of generally more robust demand during Christmas and main harvest seasons. Meanwhile, in the industry sector, the pessimism of firms in the manufacturing and mining and quarrying sub-sectors outweighed the more optimistic outlook of firms in the agriculture, fishery and forestry, and electricity, gas and water supply sub-sectors. Likewise, construction firms' outlook for the current quarter was less favorable as firms take their cue from the government's rollout of infrastructure projects.

Firms are more upbeat about their own business operations

The outlook of firms about their own business operations improved for Q4 2017 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 services and wholesale and retail trade sectors but less upbeat for industry and construction.

Employment outlook declines

The employment outlook index for the next quarter declined to 24.7 percent from 27.3 percent in the last quarter's survey. This indicates that more firms will continue to hire new employees than those that indicated otherwise even as the number of firms with hiring intentions declined relative to a quarter ago.

Expansion plans and capacity utilization decrease

The percentage of businesses with expansion plans in the industry sector for Q1 2018 decreased to 31.1 percent from 32.8 percent in the previous quarter. Meanwhile, the average capacity utilization (in the industry and construction sectors) for Q4 2017 was slightly lower at 76 percent (from 76.7 percent in Q3 2017).

Firms expect better financial conditions and easy access to credit

The financial conditions index remained in negative territory at -0.9 percent for Q4 2017 from -1 percent in the previous quarter. This means that firms that expected tighter financial conditions 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 that held the opposite view for the current and next quarters. The number of respondents with views of higher inflation increased for Q4 2017 but declined for Q1 2018 relative to the previous quarter's survey results. 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 Q4 2017 and 3.2 percent for Q1 2018 (unchanged from the previous quarter's survey results).

Respondents also anticipated the peso to depreciate for Q4 2017 and Q1 2018. Meanwhile, the percentage of respondents that expected higher interest rates increased compared to those in the previous quarter's survey.

Source: Bangko Sentral ng Pilipinas (BSP)