Philippine GDP shrinks by record 9.5% in 2020

By Beatrice M. Laforga, Reporter

THE PHILIPPINE ECONOMY suffered its worst annual contraction on record in 2020, even after gross domestic product (GDP) shrank by a slower pace in the fourth quarter, the statistics agency said on Thursday.

Preliminary Philippine Statistics Authority (PSA) data showed the country’s GDP contracted by 8.3% in the fourth quarter, a reversal of the 6.7% growth in the fourth quarter of 2019. However, this was better than the revised -11.4% in the third quarter and the record -16.9% in the second quarter.

For the full year, GDP plunged 9.5% — the steepest economic contraction in Philippine history, according to the PSA which began collecting annual data in 1947.

This was also the Philippines’ first economic contraction in more than two decades or since the -0.5% seen in 1998 amid the Asian financial crisis. It also exceeded the -7% in 1984 and -6.9% in 1985, near the end of the Marcos regime.   

Last year’s full-year GDP hit the low end of the 8.5-9.5% decline projected by the Development Budget Coordination Committee (DBCC), and matched the median estimate of the BusinessWorld poll.

“The year 2020 will be remembered as the most difficult year in our lives. The road ahead remains challenging but there is now light at the end of the tunnel,” Acting Socioeconomic Planning Secretary Karl Kendrick T. Chua said in a briefing on Thursday.

The prolonged lockdown, considered one of the strictest in the world, was implemented by the government last year to curb the spread of the coronavirus disease 2019 (COVID-19) but it came at a “huge cost” to the economy, he said.

Mr. Chua estimated quarantine restrictions cut household spending by P801 billion or an average of P2.2 billion a day in 2020.

“The fall in consumption translates into a total income loss of around P1.04 trillion in 2020 or an average of around P2.8 billion per day. On a per capita basis, annual family income declined by some P23,000 per worker, but this average masks wide differences across sectors and jobs. Some workers were hit much harder, while others lost their jobs completely,” he said.

Quarter on quarter, the economy grew by a seasonally adjusted 5.6% as more businesses reopened and more forms of public transportation were allowed to operate.

“However, it also shows the limits of economic recovery without any major relaxation of our quarantine policy,” said Mr. Chua.

Private consumption, which accounts for 70% of GDP, remained weak as it fell by 7.2% during the fourth quarter.

“Restrictions on the demand side, notably on the mobility of children, and hence families, prevented private consumption from making a stronger comeback,” Mr. Chua said.

President Rodrigo R. Duterte on Monday recalled an order allowing minors as young as 10 years old to go out, citing the risk of infection from a more contagious strain.

All major sectors shrank in the fourth quarter, led by industry (-9.9%), services (-8.4%), and agriculture (-2.5%).

“Nevertheless, we see green shoots of recovery. Investments had a slower contraction of -29.0% from -41.6% in the previous quarter. Both private and public constructions saw improvements, but inter-province travel restrictions have prevented many workers from going back to work,” Mr. Chua said.

Government spending also grew by 4.4% in the last three months of 2020, despite a high base in 2019, Mr. Chua noted.

Meanwhile, gross national income (GNI) — the sum of the nation’s GDP and net primary income (NPI) from the rest of the world — contracted by 12% during the October-December period from the 5.8% growth in the same period of 2019. For 2020, it slumped by 11.1% against 2019’s 5.2%.

REBOUND UNLIKELY IN 2021
While prospects for 2021 are “encouraging,” Mr. Chua said the economy will likely return to pre-pandemic level by mid-2022 with the further easing of quarantine restrictions, fast-tracking the vaccine rollout, and keeping COVID-19 infections “to the lowest level possible.”

The DBCC targets a 6.5-7.5% growth this year and expects the economy to expand further by 8-10% in 2022.

“Further opening the economy in 2021 will require a careful and calibrated approach given risks from new virus strains. However, prolonging the status quo of community quarantine and risk aversion is not an option,” Mr. Chua said. He suggested increasing public transport capacity, a gradual return to face-to-face schooling, and expanding the age group of people allowed to go outside, but with safeguards. 

Mr. Chua said the P4.5-trillion spending plan, an increased budget for infrastructure projects, and the passage of key economic bills will help drive economic recovery.

“Despite the 9.5% contraction in the economy, we are not counting on authorities to whip out any form of stimulus to offset the downturn, both on the monetary or fiscal front,” said ING Bank N.V. Manila Branch Senior Economist Nicholas Antonio T. Mapa, who estimated that the GDP will remain in the negative territory this quarter before rising by 13% in the second quarter due to 2020’s low base.

Mr. Mapa said household spending is likely to be muted this year as the jobless rate is likely to stay elevated. He noted private investments will not “make a significant comeback” while bank lending growth continues to be subdued.

“With only a modest pickup in government outlays expected in 2021 and with the trade balance forecast to remain in deficit, we do not see a stark pickup in economic activity with GDP growth powered mainly by base effects with the economy still lacking substantial momentum to drive growth back to the 6% level,” he added.

Capital Economics Economist Alex Holmes said the economy is likely to remain 10% smaller compared with its pre-pandemic level this year, as quarter-on-quarter growth is expected to slow down by 2-3%, with the year-on-year recovery mainly driven by base effects.

“Vaccination would be a game changer for the economy, allowing social distancing restrictions to be lifted and the resumption of tourist arrivals. But widespread inoculation doesn’t look likely until at least next year. The Philippines has so far not secured enough vaccines to cover its population and faces many logistical challenges, not least running a vaccination program across its roughly 2,000 inhabited islands,” he said in a note on Thursday.

Meanwhile, the Makati Business Club (MBC) expects the economic boost from a successful rollout of the vaccination program, will “safely trigger re-hiring and hiring for new jobs.”