Bottoming out in services could herald recovery

GLOBAL SERVICES may have bottomed out in June, signaling the possibility of the sector’s outsized role in economic recovery for services-dependent countries like the Philippines, the World Trade Organization (WTO) said.

The WTO said its services trade barometer for June fell to a record low, raising the possibility of an early recovery, though analysts seem to agree that for the Philippines, the recovery will be slow.

The index also declined 4.3% year on year in the first quarter, which the WTO says reflects slowing economic activity and the early effects of the pandemic.

“While substantial, this decline is smaller than those seen during the financial crisis over a decade ago, when services trade fell by 5.1% in the first quarter of 2009 compared to the previous year before registering an even bigger 8.9% slump in the second quarter,” WTO said.

The organization said that while the index is expected to remain below trend for the second half of 2020, recovery in passenger air transport could contribute to a “powerful” turnaround.

“The barometer’s measures are in aggregate outperforming recent trends in actual services trade, a gap that in the past has preceded a positive shift in trade momentum,” WTO said.

Rizal Commercial Banking Corp. Economist Michael L. Ricafort said that the services sector could drive a Philippine economic turnaround.

“Services account for at least 60% of the Philippine economy and would be a key driver in the economic recovery prospects as the economies further re-open from lockdowns, thereby also supporting the pick up in consumer spending, which accounts for at least 70% of the economy,” he said in an e-mail Friday.

University of Asia and the Pacific Senior Economist Cid Terosa said such an improvement could be more gradual than that of other economies.

“The Philippines will experience recovery in overall services trade but it won’t be as quick as many countries around the world because of the more urgent need to resuscitate domestic business and economic activities,” he said in an e-mail Monday.

“Domestic production of goods and services have to be revived first before the Philippines can fully benefit from possible early recovery in overall services trade.”

Union Bank of the Philippines Chief Economist Ruben Carlo Asuncion in an e-mail said that consumption related to services is still sluggish.

“Aviation and traditional retail were hit hard and may take time to recover. I do agree that there are incremental improvements in passenger air travel worldwide, but, for the Philippines, this may be initially concentrated on local travel and international travel will have to wait,” he said.

WTO’s services trade indices remain mostly below trend, especially passenger air transport, which the organization said had bottomed out.

The container shipping, construction, and global services purchasing managers’ indices also point to a possible turnaround while information and communications technology services continued to fall.

The financial services index was the exception, showing growth in line with medium-term trends.

Mr. Ricafort said that this resilience could be due to rapid digitalization in the industry in recent years. The stay-at-home and social distancing measures during the pandemic, he said, accelerated the use of online banking transactions.

He added that financial services trade is integral to the digitalizing global economy, with online payments facilitating a surge in e-commerce activities.

“The resilience of the Financial Services Trade may also be attributed to the increased preparedness by industry for any contingency/emergency/scenario including extreme ones as also required and encouraged by regulators worldwide the required business continuity plans, stress tests, recovery plans, contingency plans, and the adoption of risk management systems that are aligned with global best practices,” he said.

Mr. Ricafort added that financial institutions made trading and investment gains amid record low interest rates and bond yields that sent prices of bonds to record levels.

“Record low interest rates and increased funds/liquidity in the financial system also supported further gains in many parts of the global financial markets amid the search for higher returns to riskier investments such as equities amid liquidity-driven gains.” — Jenina P. Ibañez