Q2 growth brings 2017 goal within reach

By Jochebed B. Gonzales
Researcher
and Melissa Luz T. Lopez
Senior Reporter

THE PHILIPPINE economy grew by 6.5% last quarter on the back of increased household and government spending, putting the lower end of the government’s full-year target within reach, the Philippine Statistics Authority reported yesterday.

The latest growth reading for gross domestic product (GDP) — the value of all finished goods and services produced in the country — marked the eighth consecutive quarter that the pace exceeded 6.0%.

The 6.5% turnout was up a notch from the first quarter’s 6.4%, but was slower than the year-ago 7.1% that benefited from an additional lift from expenditures related to the May 2016 general elections.

Second-quarter growth matched the 6.5% median estimate of economists in BusinessWorld’s poll last week, while the first half’s 6.45% average compared to the government’s 6.5-7.5% full-year target range for 2017 and eased from 7.0% logged in 2016’s comparative six months.

“With our country growing by 6.5% in the second quarter of 2017, I am pleased to inform you that we remain one of the best-performing economies in Asia,” Socioeconomic Planning Secretary Ernesto M. Pernia said in a briefing yesterday.

Mr. Pernia, who is director-general of the National Economic and Development Authority (NEDA), said the Philippines is “either the second or third fastest-growing major Asian economy” next to China (6.9%), overtaking Vietnam (6.2%) and Indonesia (5.0%).

On the demand side, household consumption, which accounted for two-thirds of total expenditures in the economy, remained a key driver of growth, picking up to 5.9% from 5.8% in the preceding quarter, though slower than the year-ago 7.5%.

Government spending accelerated to 7.1% from a near-flat 0.1% in the first quarter. This was, however, slower than the 13.5% notched a year earlier.

Private investment in the form of capital formation eased to 8.7% last quarter from January-March’s 10.6% and from the past year’s 30.3%. The second-quarter pace was the slowest since the 5.1% recorded in 2014’s fourth quarter.

Total exports — both goods and services — grew 19.7%, slower than the first quarter’s 20.3% albeit faster than the year-ago 10.6%. Total imports, meanwhile, grew by 18.7%, slightly faster than the previous quarter’s 18.6% but lower than the past year’s 25.4%.

On the supply side, the industry sector grew the fastest among the three major sectors last quarter, gaining 7.3% that was nevertheless a deceleration from 7.6% in the past year. In this category, mining and quarrying lead the way with 13.7%, a reversal from the 18% and 4.0% declines posted in the first quarter and second quarter of 2016, respectively. Manufacturing followed suit as it picked up to 7.9%, faster than the readings in the first quarter (7.6%) and the same period last year (6.2%). Construction slowed down to 6.3% from last year’s 13.5%. Electricity, Gas and Water Supply’s 2.4% was also slower than the 10.3% the past year.

The services sector, which make up nearly 60% of the economy’s total output, grew by 6.1%, slower than the 8.2% in the 2016’s second quarter. Subsectors that grew above or matched the sector’s average were real estate, renting & business activities (7.9% from last year’s 8.8%); public administration & defense; compulsory social security (7.6% from 6.4%); trade and repair of motor vehicles, motorcycles, personal and household Goods (6.3% from 8.9%) as well as financial intermediation (6.1% from 6.9%).

Agriculture, hunting, forestry and fishing continued to help lift overall economic growth, expanding by 6.3% as the sector continued to recover from damage from a prolonged El Niño-induced dry spell that lasted until 2016’s second quarter, picking up from the first quarter’s 4.9% and the year-ago 2.0% contraction.

Economists look to sustained growth in household spending, which has been the backbone of the Philippine economy for years.

“Strong private consumption has been boosted by continued expansion in overseas worker remittances, which rose by 6.8% year-on-year in June, as well as rapid growth in household credit,” said Rajiv Biswas, Asia Pacific chief economist at IHS Markit.

For Security Bank economist Angelo B. Taningco, growth was partly driven by higher outlays for infrastructure. “The surge in government spending was propelled by an upswing in government’s disbursements for infrastructure and capital outlays,” he said.

Some economists also took note of the slowdown in investments last quarter after the last two years’ double-digit pace.

Gundy Cahyadi, economist at DBS Group Research, said that while private consumption had beaten forecasts, “investment growth actually did slightly worse than our expectations.”

“Inventory drawdown has continued, and this indicates that normalization in investment numbers is likely to remain a dominant theme ahead,” he said, citing “upward risks” ahead.

Mr. Cahyadi cited the “strong showing” of agriculture and manufacturing, noting that “[t]he manufacturing sector has continued to receive a boost from export demand, and this has proven to be a constant positive in recent years.”

For Ruben Carlo O. Asuncion, chief economist at Union Bank of the Philippines, investment growth could have been better if the government had been more aggressive in its outlays. “Government spending has been the missing link in… GDP growth… slower capital formation growth might have come from the softer government expenditure in [the first quarter],” Mr. Asuncion said.

Finance Secretary Carlos G. Dominguez III described in a separate statement yesterday the GDP turnout as “solid proof” of the current administration’s pursuit of “high and inclusive growth.” “With the upturn in state spending beginning in the year’s second quarter, President [Rodrigo R.]Duterte’s unparalleled investment strategy anchored on the ‘Build, Build, Build’ program has started to pick up steam,” Mr. Dominguez said.

The government’s “Build, Build, Build” program will see about P8.44 trillion spent on infrastructure projects until 2022, when this segment’s contribution to GDP should have risen to 7.45% (P1.899 trillion) from this year’s planned 5.32% of GDP (P847.22 billion).

THE ROAD AHEAD
Increased government spending, Mr. Asuncion said, “only spells well for economic expansion in the next coming quarters”, adding that “more robust investment growth” is expected this quarter. “If government spending continues to grow and with government’s absorptive capacity improving, our GDP growth [forecast] for 2017 of 6.5% should be revised higher,” he said.

In remarks sent to reporters via mobile phone message, Bangko Sentral ng Pilipinas (BSP) Governor Nestor A. Espenilla, Jr. said that growth momentum can be sustained. “The 2Q GDP growth of 6.5% confirms our view that the Philippine economic expansion remains robust… The firm economic momentum during the first half of the year alongside favorable business and consumer sentiment should augur well for the expansion of the economy over the near to medium term,” Mr. Espenilla said.

The Monetary Board kept policy rates unchanged at its rate-setting meeting last week, citing manageable inflation and firm economic activity that did not need fresh stimulus.

Mr. Espenilla said the central bank will remain watchful of economic and financial developments and “stands ready to adopt policies” that will ensure price and financial stability in the Philippines.

Economists said the rollout of public infrastructure projects would determine whether the full-year growth target can be achieved.

“More progress on infrastructure spending should also continue to crowd in private investment, while we expect household consumption to remain resilient,” Nomura analysts said in a market commentary released yesterday, as they held on to a 6.7% growth forecast.

IHS Markit’s Mr. Biswas said the growth story will be supported by “significant increases” in infrastructure spending, which will likewise rake in more foreign direct investments that would unlock more jobs and bring fresh capital for business expansions. “The ability of the Duterte administration to deliver such large increases in infrastructure spending has been helped by the tremendous progress made by successive Philippines governments since 2004 in the task of implementing fiscal consolidation, helped by the rapid pace of GDP growth and prudent fiscal management. Since 2004, the Philippines general government debt-to-GDP ratio has more than halved to a new record low of 34.6% in 2016,” he said.

On the other hand, ANZ Research said it was “increasingly cautious” on the growth story as it is fueled by real estate and construction, flagging that any excessive swings could warrant a BSP rate hike. ANZ sees a 25-basis-point increase in borrowing rates by yearend, while other observers say that the BSP has room to delay any policy tweaks until next year.

Mr. Espenilla has said that domestic inflation remains the biggest consideration for the monetary authority, reiterating that the BSP does not have to move in sync with policy tightening in the United States.

Mr. Dominguez is optimistic that accelerated state spending should “keep the Philippines in the club of Asia’s fastest-growing economies.”

“‘Build, Build, Build’ is seen to induce the multiplier effects on the domestic economy of more jobs, greater investments and improved connectivity across the regions.”