Angelo Taningco
Economist, Treasury Group

Following its robust second-quarter (Q2) GDP growth performance, the Philippines may experience a more moderate economic growth in the third quarter (Q3) as business confidence waned.

Based on the Bangko Sentral ng Pilipinas (BSP) Business Expectations Survey covering Q3 released on 25 August, the business sector’s overall confidence index for the current quarter fell to 37.9% in Q3 from 43.0% in Q2. This quarterly downturn can be attributed to survey respondents’ concerns over weak business activity and consumer demand given seasonal factors; peso depreciation; price inflation; more intense competition; damages and power disruptions triggered by the July earthquake in Visayas; and the Marawi crisis as well as martial law in Mindanao. In fact, the Q3 overall business confidence index plunged to a 12-quarter low.

By sector, construction, retail and wholesale trade, and services all exhibited a quarter-on-quarter (qoq) drop in their respective confidence levels in Q3, outweighing the qoq confidence uptick from the industrial sector (Figure 1).

Figure 1: Business Confidence Index for Current Quarter, Overall and by Sector
(%)

 
We surmise the less optimistic outlook of firms in construction, retail and wholesale trade, and services sectors could slow down the gross value added growth of these sectors in Q3, and could potentially drag GDP growth.

Moreover, we posit that domestic capital formation, which accounts for 26% of GDP, might register slower growth in Q3 due to the less optimistic business outlook, and thereby dampen GDP growth for the quarter. We provide empirical evidence of a positive correlation between business confidence index and real GDP growth, i.e., correlation coefficient at 0.67, and a highly statistically relationship between the two variables based on our regression model spanning the Q2 2001-Q2 2017 period (Figure 2).

Figure 2: Business Confidence & GDP Growth

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