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Q2 GDP growth slowdown threatens full-year target

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Ernesto M. Pernia
BERNARDINO P. TESTA

THE Philippine economy grew to its slowest pace in three years in the second quarter, leading some analysts to downgrade their forecasts despite the country remaining as one of Asia’s fastest-growing economies.

Gross domestic product (GDP) — the total amount of final goods and services produced within the country — grew 6% in the three months to June, lower than the revised 6.6% growth recorded in the same period in 2017, according to data released by the Philippine Statistics Authority yesterday.

The second quarter result was also below the revised 6.6% in the first quarter and the 6.8% median estimate in a BusinessWorld poll last week.

Gross domestic product quarterly performance (Q2 2018)

This is the slowest pace since the second quarter of 2015 when it recorded a 5.6% growth.

Year-to-date, GDP in the first half grew by 6.3%, which is also below the government’s 7-8% target band for 2018.

Gross national income — the sum of the nation’s GDP and net income received from overseas — recorded a growth of 5.8% in the second quarter, down from 6.6% previously.

In Thursday’s news briefing, Socioeconomic Planning Secretary Ernesto M. Pernia said the economy would have to grow “by at least 7.7%” in the second half to reach the low-end of the government’s growth target for this year.

“Although this growth still puts the Philippines as one of the best-performing economies in Asia, just after Vietnam at 6.8% growth and China at 6.7% growth, and ahead of Indonesia’s 5.3%, this growth rate is less than what we had hoped for,” Mr. Pernia said.

Mr. Pernia cited “policy decisions” in contributing partly to the economic slowdown such as the temporary closure of Boracay Island, and regulations affecting the mining industry such as excise tax on metallic and non-metallic minerals.

Services — the country’s mainstay that accounted for almost half of GDP — led growth among major sectors at 6.6%, faster than the 6.4% recorded in the same period last year.

Meanwhile, industry posted a 6.3% growth, slower than the 7.1% print in 2017.

Manufacturing remained the top contributor to industry growth even as it slowed down to 5.6% from the 7.6% growth in the first quarter and 8% in the second quarter of 2017, chipping in 3.7 percentage points to the 6.3% industry growth.

The construction sector grew by 13.5% in the second quarter compared to last year’s 4.3% and 8.8% in the first quarter.

Mining and quarrying, meanwhile, went the other direction as it declined by 10.9% versus the 6.9% expansion seen in the first quarter and the 19.2% growth in the second quarter of 2017.

Agriculture also grew albeit marginally at 0.2% versus the 6.3% growth posted a year ago.

Mr. Pernia noted the “dismal” harvests in palay (paddy rice), corn, sugarcane, and mango as well as the weak output in coconut including copra, livestock, and poultry.

“[T]his supports our premise that the main reason behind the high inflation is the gross deficiency in the domestic production of food, which was not augmented by imported goods, especially rice,” said the Cabinet official, reiterating the need to lift the quantitative restrictions on rice imports and impose a 35% tariff on the staple food item to help ease food inflation.

“[D]espite the price pressures, domestic demand remained buoyant at 10.1% [growth] — driven by household consumption and investments,” he said.

On the expenditure side, household spending — which made up roughly 56% of second-quarter GDP — was up 5.6% in the second quarter, slower than the 6% growth logged in the second quarter of 2017.

Exports of goods and services expanded at a slower pace of 13% compared to 2017’s 21.4%. Imports, meanwhile, grew 19.7% from 18.6%.

On the other hand, government spending went up by 11.9%, slower than the 13.6% in the first quarter, but faster than the 7.6% in the second quarter of 2017.

Capital formation, which is a measure of private investment, posted faster growth at 20.7% compared to 12.4% in the first quarter and 7.6% last year.

OUTLOOK
Market players now expect a slower full-year expansion for the country this year following the second-quarter growth turnout, noting that times have turned more “challenging” for the economy amid rising prices.

In separate commentaries, bank economists said they now see full-year GDP growth to be slower than their initial forecasts, leaving slimmer chances to hit the government’s 7-8% goal and could even settle below the 6.7% pace logged in 2017.

ANZ Research has scaled down its forecast to 6.6% from 6.8% following the first semester print, amid concerns on the trend for domestic demand as well as net exports.

ING Bank N.V. Manila senior economist Jose Mario I. Cuyegkeng was likewise of the same sentiment: “Downward revisions of 2018 GDP forecast are necessary not only as a result of the downside surprise of 2Q and the downward revision of 1Q GDP growth,” he said.

Previously, ING expects full-year growth at 6.8%.

Mr. Cuyegkeng also pointed out that the weaker peso — which has traded above P53 versus the dollar since June — has “not encouraged” significant investments in the export sector. It has likewise failed to lift outbound shipments of goods despite bigger valuations during the first half of the year.

A widening trade imbalance and soft farm output have dragged overall economic activity, aggravated by high inflation which “could have dampened household spending,” the ING analyst added.

Prices of widely used goods trended above four percent since April and even hit 5.2% in June. Year-to-date, inflation has averaged 4.5% as of end-July to surpass the 2-4% target range.

Nomura economists Euben Paracuelles and Charnon Boonnuch also flagged a possible scaling down of their 6.9% growth estimate for 2018 given dismal turnout for agriculture, mining, manufacturing and services.

“Still, we expect an acceleration of growth in H2, led by investment spending as the government makes more progress in implementing infrastructure projects, which should crowd-in private sector spending,” Nomura said.

Rajiv Biswas, chief economist at IHS Markit, said the easing growth momentum meant the central bank and the state economic managers “face a more challenging economic outlook.”

“Looking ahead, we expect the slowdown in GDP growth to continue over the second half of this year as tighter monetary policy and higher inflation weighed on consumer spending,” said Capital Economics Senior Asia economist Gareth Leather in a note.

“The economy is likely to expand at a decent pace over the next year, although growth will fall well short of the government’s target of 7-8% target. On the plus side, demand should be supported by a big increase in infrastructure spending,” he added.

Angelo B. Taningco, economist at Security Bank Corp., likewise revised the GDP growth forecast for 2018 downwards by 0.3 percentage points to 6.5% from 6.8% previously, adding that a 7% full-year growth is unlikely as inflation is expected to remain elevated for the rest of the year.

Economists cited key risks to growth such as further increases in world crude prices, and the escalating US-China trade war which could affect Philippine export products. — Carmina Angelica V. Olano and Melissa Luz T. Lopez