By Ranier Olson R. Reusora
Researcher
THE Philippine economy grew in the first quarter on the back of double-digit growth in government spending, but could have performed better if it were not for the nagging inflation that tempered household spending, the government reported yesterday.
Gross domestic product (GDP) — which measures the amount of final goods and services produced in a country — grew 6.8% annually in the first three months of this year, faster than the 6.5% growth recorded in the same period in 2017.
The first-quarter GDP growth figure was at par with the median estimate in a BusinessWorld poll of economists conducted last week, but slightly below the government’s 7-8% target for the year.
GDP Q1
Gross national income — the sum of the nation’s GDP and net income received from overseas — recorded a growth of 6.4% in the first quarter of 2018, up from 6.3% previously.
Socioeconomic Planning Secretary Ernesto M. Pernia said in a news briefing yesterday this was the tenth consecutive quarter of the Philippine economy expanding at a pace of 6.5% or better.
On the demand side, government spending registered a 13.6% growth in the first quarter from a measly 0.1% in the same period last year. Private investment, as measured by capital formation, was likewise up by 12.5% from 11.4%.
“[T]he upbeat performance in public construction, government consumption, and capital formation indicates that our reform efforts are bearing fruit and infrastructure development is accelerating, as planned,” said Mr. Pernia, who is also the National Economic and Development Authority’s (NEDA) director-general.
On the other hand, household spending eased to 5.6% during the quarter from 5.9% in 2017’s comparable three months, to which Mr. Pernia blamed to “rising inflation and interest rates, and weaker consumer confidence.”
Analysts Shashank Mendiratta and Sanjay Mathur at ANZ Research said in a research note that the easing in consumer spending “is likely temporary with some expenditures front-loaded ahead of the tax reform in early 2018.”
Also dragging the first quarter performance was the slower pace of exports and imports, which grew by 6.2% and 9.3%. Last year, exports and imports recorded 17.4% and 18.7% growth, respectively.
On the supply side, the industry sector led growth among major sectors at 7.9%, faster than the 6.5% recorded in the same period last year. The sector was lifted by growth in manufacturing (8% from 7.7%) and construction (9.3% from 9.7%).
In particular, public construction improved to 25.1% from 2.1%, while private construction slowed to 6.8% from 13.6%.
Mining and quarrying rose 4.5% during the quarter, a reversal from the 17.8% contraction seen in the first quarter of 2017.
Services likewise grew 7% in the first quarter from 6.7% in 2017’s comparable three months.
Subsectors that posted above-average growth were public administration & defense; compulsory social security (13.2%); “other services” (8.8%) and financial intermediation (7.6%).
Agriculture, meanwhile, recorded a slower growth of 1.5% from 4.9% posted a year ago. This was due to the fishing sector’s 3.7% decline, its fourth straight quarter.
Commenting on the industry sector’s growth supported by manufacturing and construction, Mr. Pernia noted this indicates the government’s “Build, Build, Build” program “ is gaining ground.”
In a separate statement, Finance Secretary Carlos G. Dominguez III said President Rodrigo R. Duterte and his administration’s commitment to attaining “an investment-led and inclusive economy… would usher in what the Asian Development Bank has forecast to be the country’s ‘golden age’ of economic growth.”
Mr. Dominguez likewise credited the passage of the Tax Reform for Acceleration and Inclusion (TRAIN) law, which is expected to provide a steady revenue flow for the government’s infrastructure program.
Government data showed that the Bureau of Internal Revenue collected P423.1 billion in the first quarter, exceeding its P361.8-billion target while the Bureau of Customs raised P129.8 billion, a tad higher than its P129.5-billion goal.
“With President Duterte’s foreign policy recalibration, which has enabled the government to secure ODA (official development assistance) from our friends in the region plus grants and concessional loans from multilateral institutions; above-target performance by our revenue agencies as a result of the TRAIN (Tax Reform for Acceleration and Inclusion) Law; and investment-grade credit ratings responsible for successful bond floats here and abroad, the government now enjoys a large headroom for high — and inclusive — growth,” he said.
Budget Secretary Benjamin E. Diokno said the government’s infrastructure program “definitely contributed to higher government spending” for the quarter.
“Increased government spending has translated to a strong showing for the Philippine economy in Q1,” he added.
According to data by the Department of Budget and Management (DBM), infrastructure and capital outlays in the first quarter surged 33.7% to P157.1 billion from the P117.5 billion recorded in the first quarter of 2017. The DBM further noted that it exceeded the P143.4-billion first-quarter target by 9.6%.
SPOILER
Mr. Pernia said economic growth would have reached the mid-range of the government’s 7-8% full-year target, if not for inflation, which he called a “spoiler.”
“[I]f not for the first quarter 2017 to the first quarter 2018 rate of increase in inflation, real GDP growth would have been well within our growth rate targets of 7.0 to 8.0 percent,” the NEDA chief said.
“It could have been approaching… Probably, the mid-range of the target or a little less of that,” he added.
Government data showed that inflation during the first 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.
To recall, the first package of TRAIN was passed last December and took effect in January. The law effectively 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.
Nevertheless, the Philippines remains one of the best performing economies in the region, following Vietnam’s 7.4%, same with China’s 6.8% and higher than Indonesia’s 5.1%.
“Growth is not the problem, and the most recent GDP print proves that,” Noelan Arbis, economist at HSBC Global Research, said, noting inflation is “the most immediate risk to the economy.”
“Inflation has continually breached the Bangko Sentral ng Pilipinas’ (BSP) 2-4% target since the beginning of the year, in large part due to possible second-round impacts from the recent tax reform and rising inflation expectations,” he said.
OUTLOOK
For Rajiv Biswas, APAC chief economist at the HIS Markit, rapid infrastructure spending will continue to support expansion in domestic demand for the rest of 2018. He noted the widening trade deficit as a result of rising imports of capital goods and the increasing oil import bill will remain a drag on GDP.
“Overall, the Philippine economy is forecast to grow at a rapid pace of 6.6% in 2018, albeit somewhat below the lower end of the government’s target of 7% to 8% GDP growth,” he said.
ANZ’s Messrs. Mendiratta and Mathur echoed this view: “The prospects for rest of the year remain favorable with domestic demand likely to be further augmented by the government’s planned increase in infrastructure spending.”
Ruben Carlo O. Asuncion, chief economist at the Union Bank of the Philippines, also maintained his view of 7% growth for the year.
“Growth risks would be the elevated level of prices in the economy. Although inflation is expected to go back to the mid-point of the government’s target by 2019, inflation will continue to be a growth risk moving forward,” Mr. Asuncion said.
For HSBC’s Mr. Arbis: “With growth figures remaining robust, we believe the economy is strong enough to absorb a policy rate hike.” — with inputs from Melissa Luz T. Lopez and Elijah Joseph C. Tubayan

RELATED ARTICLESMORE FROM AUTHOR