Concerns over softer demand for goods and weaker consumer spending, volatility of world oil prices, and the effects of El Nino on business activity have made businesses pessimistic about the future according to the latest Business Expectations Survey.

The Bangko Sentral’s latest Business Expectations Survey (BES) showed that the Confidence Index (CI) for the second quarter of the year declined to 32.1% from 33.1% in the first quarter of 2024. Based on the survey results, the decline can be attributed to weaker demand for products and services, stiff domestic and foreign competition, possible escalation of the ongoing conflicts in Gaza and Ukraine, and higher food prices.

The sentiment for the third quarter and the next 12 months is similarly bleak. The Confidence Index on outlook for the third quarter dropped to 43.7% from 48.1% in the first quarter, and to only 56.5% (Q2) from 60.8% (Q1), for the next 12 months.

Industries Show Mixed Results; Trading Firms Generally Less Optimistic

Sentiment across industries was mixed in the second quarter, with the wholesale and retail trade sectors being more positive, while the construction and services sectors were less confident about medium-term prospects.  

Outlook across all types of trading firms is dimmer, except for the importers, as firms anticipate higher demand for travel agency services for out-of-town and overseas trips, as well as air conditioning systems brought on by the hot dry season.

Capacity utilization of industry and construction firms declined, as it dipped to 72% in the second quarter from 72.3% in the first quarter.

Access to credit is expected to be more difficult, as bank lending standards become stricter. This translated to a lower financial condition index in the second quarter.

Slower Employment and Expansion Plans Expected

The pace of hiring and industry expansion plans may slow down for the third quarter 2024 and the next 12 months, after the employment outlook index for the quarter and the next 12 months declined to 19.2% and 29.5% (from 23.5 % and 33.4 % in the first quarter), respectively. The Bangko Sentral believes the decline suggests that firms may still hire more workers but may do so at a slower pace, compared to the first quarter.

Weaker Peso, Higher Prices, and Borrowing Cost

Affirming businesses’ pessimism, are expectations of weaker economic indicators. Businesses expect the peso to depreciate further, while interest rates and the inflation rate to increase.

The survey showed that firms expect the peso to grow weaker against the U.S. dollar until the third quarter, but may appreciate in the next 12 months. However respondents expect inflation and borrowing rates to consistently rise in the second and third quarters, as well as in the next 12 months. Firms expect the inflation rate to reach up to 4.5% next year, higher than the government’s target of a 2% to 4% range for 2024 and 2025.

Businesses cited stiff competition, insufficient demand, and high interest rates as the major risks they faced in the second quarter of 2024.

The second-quarter Business Expectations Survey (BES) was conducted from April 5 to May 23 2024, and covered 1526 firms nationwide.

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