Economic growth picks up in Q1 — poll

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By Carmina Angelica V. Olano

ECONOMISTS expect economic growth to pick up pace in the first quarter on the back of higher household and consumer spending that would largely offset the effects of inflation and the wider trade deficit.

A poll of 10 economists yielded a 6.8%median estimate of gross domestic product (GDP) growth for January-March 2018, faster than the revised 6.5% recorded in the first quarter of 2017.

This puts the growth pace near the low-end of the government’s 7-8% target band for 2018.

GDP Poll new

The Philippine Statistics Authority is scheduled to release the official GDP data on Thursday.

In a note last Friday, Moody’s Analytics gave a 6.8% first quarter estimate, saying that demand-side factors have placed the economy “in somewhat of a sweet spot” as the country continues to enjoy “steady inflows” of remittances; a “firm labor market”; and “robust” investments on account of the government’s aggressive infrastructure spending.

The country’s economic managers were likewise optimistic with Socioeconomic Planning Secretary Ernesto M. Pernia telling reporters last month that first quarter economic growth “would at least touch seven percent or skirt around seven percent,” while the officials at the BangkoSentral ng Pilipinas (BSP) noted that the economy is capable of absorbing future interest rate hikes.

Market expectations reflected the bullish forecast based on the economists polled last week, with most in agreement about consumer and government spending as growth drivers.

“Robust government spending on infrastructure is expected to make a huge impact on Q1 economic growth,”saidRuben Carlo O. Asuncion, chief economist at Union Bank of the Philippines (UnionBank). He estimated 6.9% economic growth for the quarter.

“On the supply-side, services and industry are expected to contribute to growth with agriculture also pitching in,” he said.

Rajiv Biswas, APAC chief economist at the IHS Markit concurred: “GDP growth in Q1 2018 is expected to strengthen to 7.0% year-on-year, helped by a strong upturn in government infrastructure spending and robust consumer demand.

Guian Angelo S. Dumalagan, market economist at the Land Bank of the Philippines, estimated 6.9% saying the economic growth pickup in the first quarter “might be a result of stronger increases across all major expenditure components” with consumer spending and private investments rising despite inflationary pressures.

“Consumer spending likely picked up as the reduction in personal income taxes increased households’ disposable income, allowing consumers to spend more despite higher inflation,” Mr. Dumalagan said.

“The robust growth in OFW remittances, whose purchasing power has been amplified by a weaker peso, also helped consumers hurdle the sharper rise in consumer prices. Government spending likewise gained momentum,” he added.

Michael L. Ricafort, economist at the Rizal Commercial Banking Corp. (RCBC), was of the same opinion, adding that on the supply side, manufacturing is expected to pick-up further “amid record-high FDIs in recent years.”

Jefferson A. Arapoc, economist at the University of the Philippines (UP), gave a 6.9% GDP growth estimate: “I believe that the good showing of the manufacturing sector and the rolling out of government infrastructure projects will fuel GDP growth…,” he said.

FDIs in the manufacturing sector grew 244% to $1.15 billion from 2016’s $334.35 million last year, accounting for 35% of the $3.263-billion equity capital placements – which excludes reinvested earnings – in 2017 that in turn contributed to a fresh record-high $10.049 billion.

Meanwhile, the government spent a total of about P782 billion in the first quarter, 27% more than the P615.4 billion spent in the first quarter of 2017 and surpassing the P755.8 billion goal.

Furthermore, Department of Budget and Management data showed infrastructure and capital outlays growing 33.7% to P157.1 billion during the quarter from the P117.5 billion recorded in 2017’s comparable three months, exceeding the government’s P143.4-billion target for the quarter by around 9.6%.

The government is expected to allocate P699.312 billion to infrastructure spending for the entire 2018, or equivalent to 4% of GDP.

The quarter also saw the passage of the first package of the Tax Reform for Acceleration and
Inclusion (TRAIN) act. To recall, package 1 of TRAIN, which was scheduled to take effect in January, reduced income taxes of almost all of the country’s taxpayers, but also levied additional taxes on products that include sugar-sweetened beverages, cigarettes, fuel and cars.

The passage of TRAIN and the “massive” infrastructure program led Fitch Ratings to upgrade the country’s credit rating from BBB- to BBB with a “stable” outlook. The new rating marks the first major upgrade secured under the Duterte administration with the last upgrade being made on September 2015.

Risks on growth

Nevertheless, key risks remain with economists pointing to the country’s increasing inflation and worsening trade balance as threats to their outlook.

Government data showed that inflation during the quarter posted a 3.8% growth, which is near the high-end of the government’s 2-4% target for the year on account of higher prices of food as well as alcoholic beverages and cigarettes due to the TRAIN law.

Meanwhile, latest trade data show total merchandise imports growing 14.7% as of the January-February period, already surpassing the government’s 10% target this year. On the other hand, year-to-date merchandise exports was only up a percent, way-below its nine percent target for the year. This brought trade deficit in the first two months of the year at $6.23 billion, bigger than the $4.24 billion shortfall recorded in 2017’s comparable two months.

“Although I expect robust and higher growth for the Philippines, I expect inflation to be the main risk in my GDP outlook,” UnionBank’s Mr. Asuncion said.

Cid L. Terosa, senior economist at the University of Asia and the Pacific, was of the same view: “[T]he short-term inflationary effect of the TRAIN law and higher prices of utilities dragged growth in the first quarter.”

UP’s Mr. Arapoc, for his part, cited the “huge dip” on consumer confidence in the BSP’s Consumer Expectations Survey for the January-March period that might hamper the economy’s growth moving forward: “[The drop] can be ascribed to the anticipation of higher prices due to the implementation of the TRAIN law,” he said.

The first quarter reading in that survey yielded a 1.7% net confidence score, plunging from 9.5% during the fourth quarter of 2017 and the 8.7% recorded in the fourth quarter of 2017.

For IHS’s Mr. Biswas, a key risk to the positive outlook for the Philippine economy would be if world oil prices would “rise significantly” above the $75 per barrel for Brent crude. “

“[This] could push up inflation pressures and force the BSP to hike policy rates more than currently expected by financial markets,” he said.
Higher oil prices, Mr. Biswas said, would also result in a widening trade deficit “which could increase the drag on GDP growth from net exports” as well as put a downwards pressure on the peso.

RCBC’s Mr. Ricafort agreed: “Going forward, relatively wider trade deficits due to higher imports from a year ago would remain to be a drag on GDP growth… for the rest of 2018.”

He noted, however, that the faster pickup in imports may “reflect increased demand for imported capital equipment, raw materials, petroleum, and consumer goods” amid the country’s improved economic fundamentals.

On the other hand, UnionBank’s Mr.Asuncion said that the widening trade deficit “is not a concern.”

“Increasing imports are composed largely of capital goods and raw materials that feed into further economic activities, which is good altogether for economic growth,” he said.





CORRECTION: An earlier version of this article erroneously reported​ 6.6% gross domestic product (GDP) growth forecasts made by Guian Angelo S. Dumalagan, market economist at the Land Bank of the Philippines and Jefferson A. Arapoc, economist at the University of the Philippines. The figures should be both 6.9% from the 6.6% reported originally.