Business outlook on the economy turned less optimistic for Q4 2018, with the overall confidence index (CI) declining to 27.2 percent from 30.1 percent in Q3 2018, the lowest level since Q1 2010. 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.

Despite the expected uptick in demand during the Christmas season, business outlook was less buoyant for the current quarter due to (a) higher inflation driven by rising raw material costs and global oil prices, (b) weakening peso, (c) higher interest rates (i.e., borrowing costs), (d) decrease in volume of sales and orders, and (e) lack of supply of raw materials. The sentiment of businesses in the Philippines mirrored the less buoyant business outlook in the U.S., U.K., Australia, France, Hong Kong, South Korea and Thailand. However, business sentiments in Canada, Brazil, Hungary, and the Netherlands were more upbeat.

Respondents expected the less bullish business conditions to continue for the quarter ahead (Q1 2019) as the index remained positive, but lower at 29.4 percent from 42.6 percent in the previous quarter. This is the lowest next quarter reading since Q3 2009. Respondents attributed their weaker outlook for Q1 2019 to the usual slowdown in consumer demand after the holiday season. Moreover, sentiment of firms was tempered by expectations of a peso depreciation, which increases the costs of imports, as well as higher inflation and interest rates.

Sentiment across different types of businesses is mixed

The sentiment across different types of trading firms was mixed for Q4 2018. The outlook of exporters and dual-activity firms (i.e., both importer-exporter) was affected largely by higher overhead costs, particularly fuel, lack of supply of raw materials (e.g., tuna), and slack in demand for electronics, home furniture and sugar-sweetened products (partly due to higher sugar excise taxes). Moreover, exporters and dual-activity firms registered the lowest indices since Q2 2016 and Q3 2009, respectively. Meanwhile, outlook of importers improved in anticipation of an increase in consumer demand and inflows of Overseas Filipinos' (OF) remittances during the Christmas season. Conversely, sentiment of domestic-oriented firms was steady as expectations of a seasonal uptick in demand were tempered by views of higher prices on basic commodities and interest rates.

Business confidence across sectors is generally less favorable

Business sentiment across sectors was generally less optimistic for Q4 2018 and Q1 2019. Across sectors, firms' outlook was adversely affected by rising commodity prices (both in the domestic and global markets).

The industry sector registered the biggest decline in confidence. Moreover, firms involved in mining and quarrying turned pessimistic, mainly as a result of the moratorium on new large-scale mining projects and the closure of several mining pits. Construction firms were less upbeat for Q4 2018 as they await the results of the bidding process of government projects. Likewise, the outlook of the services sector turned less favorable for the current quarter due to the lower confidence of firms in the real estate, business activities, and financial intermediation sub-sectors. However, sentiment of firms in the hotels and restaurants and transportation sub-sectors turned more bullish as they expected an increase in tourism activities and higher volume of passengers during the holiday season. Meanwhile, sentiment in the wholesale and retail trade sector improved with expectations of generally more robust demand during the Christmas and main harvest seasons.

Firms' outlook about their business operations weakens

Consistent with the less upbeat sentiment on the macroeconomy, the outlook of firms about their own business operations generally weakened for Q4 2018 and Q1 2019. However, the wholesale and retail trade sector bucked the overall trend on expectations of higher volumes of business activity and total orders booked for the current quarter. Likewise, construction firms expected the volume of their business activities to step up for the next quarter.

Employment outlook index declines

The employment outlook index for the next quarter remained positive although lower (at 21.8 percent) compared to the last quarter's survey (at 26.3 percent). This suggests that more firms will continue to hire new employees than those that said otherwise, although the number of new hires could decrease compared to the previous quarter's survey. Employment prospects were expected to moderate across sectors.

Expansion plans declined slightly while capacity utilization increases

The percentage of businesses with expansion plans in the industry sector for Q1 2019 declined slightly to 36 percent from 36.1 percent a quarter ago. However, the average capacity utilization (in the industry and construction sectors) for Q4 2018 was higher at 76 percent (from 75.1 percent for Q3 2018).

Firms expect tighter financial conditions but ease of access to credit

The financial conditions index continued to worsen as it registered -10.6 percent for Q4 2018 compared to -5.3 percent in the previous quarter. This means that firms that expected tighter financial conditions continued to outnumber those that said otherwise during the quarter. However, firms were of the view that their financing requirements could be met through available credit as respondents reported ease of access to credit.

Inflation is expected to be above-target for 2018

The survey results showed that businesses anticipated inflation to increase, the peso to depreciate, and interest rates to rise for the current and next quarters. Businesses expected that the rate of increase in commodity prices will breach the upper end of the government's 2 to 4 percent inflation target range for 2018, at 6.1 percent for Q4 2018 and 6 percent for Q1 2019 (from 4.7 percent and 4.8 percent, respectively, in the previous quarter's survey results). Moreover, businesses anticipated that the peso will average at Php 53.9 for Q4 2018 and Php 54.1 for Q1 2019.

About the Survey

The Q4 2018 BES was conducted during the period 1 October - 23 November 2018. There were 1,463 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 2016, consisting of 581 companies in the NCR and 882 firms in the AONCR, covering all 16 regions nationwide. The survey response rate for this quarter was lower at 82.4 percent (from 83.6 percent in the previous quarter). The response rate was unchanged from the previous quarter at 80 percent for the NCR and lower for the AONCR at 83.9 percent (compared to 86.1 percent in the previous quarter).

Source: Bangko Sentral NG Pilipinas (BSP)