GDP impact of budget delay carried over to second quarter — poll

ECONOMISTS expect gross domestic product (GDP) growth in the second quarter to have picked up from the first-quarter expansion, driven primarily by stronger household spending amid slower inflation, but weighed down by residual impact of delayed enactment of the 2019 national budget that was signed in mid-April.

A poll of 15 economists yielded a median GDP growth estimate of 5.9% for the second quarter, picking up from the 5.6% growth recorded in the first quarter that was the slowest in four years, albeit slower than the 6.2% clocked in last year’s second quarter.

If realized, this would bring GDP growth to 5.7% in the first half, compared to the 6-7% target set by economic managers for this year.

The Philippine Statistics Authority will report the official second-quarter GDP data on Thursday, hours ahead of the Bangko Sentral ng Pilipinas’ (BSP) fifth monetary policy review for the year.

Socioeconomic Planning Secretary Ernesto M. Pernia told reporters at the sidelines of the 27^th Metro Manila Business Conference at the Manila Hotel last June that second-quarter growth is “not as strong as the third quarter would be,” although a 6.5% GDP growth for the year would be “attainable” with election-related expenditures and consumer spending providing the lift.

This view was echoed by then BSP Deputy Governor Diwa C. Guinigundo, who told reporters on the sidelines of the 2019 pre-State of the Nation Address economic and infrastructure forum on July 1 that the economy likely grew faster in the second quarter as the government catches up with its spending plan along with low inflation and interest rates that stimulated household spending and private investments.

While economists interviewed by BusinessWorld expect second-quarter growth to have picked up from January-March, most were in agreement that adverse effects of the four-month delay in national budget enactment have spilled over to the second quarter, thereby tempering it.

“We expected real GDP growth in Q2 to rebound following a sluggish first quarter. However, leading indicators suggest otherwise and as such Q2 is bound to be unremarkable,” said Security Bank Corp. Treasury Group assistant vice-president and chief economist Robert Dan J. Roces, who gave a 5.9% GDP estimate for the second quarter.

“Recall that the sluggishness in the prior quarter was mostly due to reduced government spending because of the delay in the approval of the 2019 budget… followed by a spending ban ahead of the midterm elections last May 13… [The] [g]overnment vowed to implement a catch-up spending plan post-elections to mitigate the impact, to little effect as government spending fell by 2.3% year-on-year to around P812.2 billion in [the second quarter],” Mr. Roces explained.

Budget department data show the government spent P812.2 billion last quarter, 2.3% less than a year ago, with infrastructure and capital outlays totaling P133.3 billion, 31.9% less than the year-earlier P195.6 billion.

Mr. Roces also noted that the April and May fiscal balance was in surplus, “suggesting that the effects of the delayed budget have crept into the [second] quarter.”

“Overall, this means that second-quarter growth will be hard-pressed to reach or exceed six percent, with lackluster government spending continuing to be the main drag; despite a rebound in private consumption because of tapering inflation.”

Bank of the Philippine Islands lead economist Emilio S. Neri, Jr., who gave a 5.8% forecast, shared a similar view: “Persistent government underspending and slowdown in loan growth due to tight monetary conditions likely kept overall demand soft except for household consumption.”

The government operated on a reenacted 2018 budget from January to April 15, when President Rodrigo R. Duterte signed this year’s national budget into law but vetoed P95.3 billion in funds that were not in sync with state priorities, slashing the total to P3.662 trillion.

GDP-related data to be released this week are July inflation and June Monthly Integrated Survey of Selected Industries both on Aug. 6, as well as international merchandise trade and second-quarter farm output on Aug. 7.

ING Bank Manila senior economist Nicholas Antonio T. Mapa said that household spending “will likely do the heavy lifting… all the more with inflation decelerating.”

Mr. Mapa noted that besides the expected negative contribution of government spending, capital formation “will remain subdued” as the economy continues to feel knock-on effects of the BSP’s aggressive hikes last year that totaled 175 basis points as it sought to tame successive multi-year-high inflation rates that peaked at a nine-year-high 6.7% in September and October.

“[The] below-target GDP, decelerating inflation and the threat of external headwinds will be enough to prod the BSP to action and continue to walk back last year’s ultra-aggressive rate hike cycle now that the price objective is in hand,” Mr. Mapa said.

Mr. Mapa also expects the trade gap to be wider, “which will weigh on growth anew.”

“I’m waiting for trade numbers to seal the deal on the final number, but right now I see GDP growth at 5.8%,” he said.

On the supply side, economists expect agriculture to remain a laggard in the second quarter. The sector accounted for a measly 0.1 percentage point of the 5.6% first-quarter GDP growth.

“Agriculture is still expected to have minimal impact… while both industry and services are expected to improve in the second quarter,” said UnionBank of the Philippines, Inc. chief economist Ruben Carlo O. Asuncion, who estimated a 5.9% GDP expansion for the second quarter.

For Ateneo de Manila University economist Alvin P. Ang, “services will continue as growth leader in the income side, particularly wholesale trade buoyed by the recent elections, while [the] expenditures side will continue to be led by personal consumption with modest government contributions.” He also estimated second-quarter GDP expansion at 5.9%.

Preliminary data released by the PSA showed the country’s year-to-date trade deficit of $16.51 billion as of May, bigger than the $15.68-billion shortfall in January-May 2018. Year to date merchandise exports and imports were down 1.3% and up one percent, respectively, against the revised two percent and seven percent respective growth targets of the Development Budget Coordination Committee for full-year 2019.

Separate PSA data also showed inflation averaging 3.4% last semester against the 4.3% average in 2018’s first half. The year-to-date inflation average settled near the ceiling of the DBCC’s revised 2.7%-3.5% inflation assumption for the year and past the midpoint of the central bank’s 2-4% target band.

OUTLOOK
Economists expect economic growth to pick up steam this semester.

“[G]overnment spending is likely to accelerate in [the second half of 2019] as infrastructure spending program gets under way with the release of funds for several projects,” said Security Bank’s Mr. Roces.

“Inflation is on a downtrend and likely to continue… thus, aiding private consumption,” he added.

“However, as capital goods imports rise with higher demand due to the government’s infrastructure program, the trade deficit is expected to widen.”

Rizal Commercial Banking Corp. economist Michael L. Ricafort shared this outlook, citing market expectations that the BSP will continue to loosen monetary policy.

“Monetary easing through lower key short-term interest rates and… lower reserve requirement ratio of banks… would support greater lending to businesses, consumers and other institutions that, in turn, would further spur greater economic activities and faster GDP growth in the coming months,” Mr. Ricafort said.

For Capital Economics’ Asia economist Alex Holmes: “[G]rowth is likely to recover some more as delayed government spending kicks in.”

“But with the economy still likely to face a tough external environment, we aren’t expecting a strong rebound…” – Christine Joyce S. Castañeda