ANALYSIS: Can the economy handle this kind of growth?

Jose Galang - Your Business

Posted at Aug 17 2017 05:11 PM

In a six-month period that saw the government spending far more than its set target, the economy grew at a pace that was slower than its expansion in the same period last year.

The value of all goods and services produced by the domestic economy in the January-June period this year increased in real terms by 6.4 percent from the year-ago level, according to gross domestic product (GDP) data newly released by the Philippine Statistics Authority (PSA). In the first six months last year, the GDP growth rate was 7.0 percent. 

The January-June growth was also slower than the 6.8 percent posted in the immediately preceding six months (July-December 2016), indicating a downward trajectory in recent semestral growth rates.

Since the start of this year, the Duterte administration’s economic managers have been declaring plans to ramp up public spending in order to speed up growth. Indeed, by the end of June, the government had exceeded both its expenditure and budget deficit targets for the period, mainly on account of its big-ticket infrastructure pet projects.

This spending strategy resulted in a first-half increase of 9.7 percent in the capital formation, a measure of physical inventories and investment accumulated by the economy on which future growth can be anchored. This increase, however, was much slower than the 30.9 percent recorded in the first half of last year, and also the 17.8 percent growth in the second half.

The average GDP growth in the first four quarters (July 2016-June 2017) of the Duterte government was around 6.7 percent, compared to 6.8 percent in the comparable preceding four quarters (July 2015-June 2016) when public spending was more subdued.

Growth drivers

The service sector (including transport, communications, trade and repair of vehicles and personal and household goods, banking, real-estate, renting and business activities) accounted for the biggest share—47.6 percent—of the first-half growth. The service sector, also the economy’s top employer, includes operations of call centers and business process outsourcing firms.

There was also a substantial 28.1 percent share of the overall growth contributed by industry (which groups manufacturing, mining and quarrying, construction, and electricity, gas and water supply). Manufacturing alone generated 19.5 percent of the growth. 

On the other hand, agriculture, which continues to account for over a quarter of all workers in the country, contributed 7 percent of the first-half growth.

While agriculture output registered a brisk increase of 5.6 percent in the first half compared to the year before, growth in the industry sector slowed to 6.8 percent (from 8.4 percent last year) due to a much slower construction activity that the manufacturing sector’s modest gain could not offset. The service sector also posted a slower growth this year, with most sub-sectors recording lower expansion rates.

No cause for concern?

While administration officials insist that recent developments, most of them resulting from measures initiated by the government to rev up the economy, are no cause for concern, business executives and consumers alike are becoming agitated.

For instance, the increased demand for dollars to pay for imports—up by 21.8 percent according to the first-half GDP report—has also pulled down the peso exchange rate. Against the US dollar, the peso has fallen to nearly 11-year lows, which is certain to increase the cost of imported supplies and equipment as well as repaying foreign currency-denominated loans. Analysts say the peso decline has not reached its bottom yet.

To this could be attributed a drop in the country’s terms of trade, a measure of the purchasing power of exports in relation to import costs. In the first half, this purchasing power of Philippine exports weakened by 3.1 percent from first half 2016, and by 5.2 percent from 2015, according to the GDP data. That can translate to larger costs for an import-dependent economy like the Philippines, especially given its huge trade deficit.

The administration’s big-spending ways has pushed up the rate of increase in prices of basic consumer goods. In the first half of this year, which saw the amount of money in circulation expanding by nearly 15 percent, the inflation rate averaged 3.1 percent—more than double the rate last year. The price increases were significantly faster in such regions as Bicol, Eastern Visayas and Cagayan Valley where incomes are lower than those in urban areas.

For every peso earned by an average Filipino wage earner, it spends around 65 centavos on food, transport and housing and fuel, and this is where the biggest rates of price increases were noted in the first half. If the government gets Congress approval to impose new taxes on a wide range of goods and activities, price increases are bound to be more painful for the Filipino consumer.

Household expenditures

Indeed, the latest GDP data indicates that household consumption expenditure in the first half grew by 5.8 percent, significant slowdown from the 7.3 percent growth in the same period last year. The biggest rates of decline in household spending were on food, health, housing (including water and fuel), transport, and communication. Declines were seen in recreation and culture, and alcoholic beverages and tobacco.

Per capita household consumption expenditure increased by 4.3 percent in the first half of this year, a sharp drop from the 5.6 per cent increase in the same period last year.

And this is just the start of an era that envisions more, bigger sums of spending on the way to a so-called “golden era of infrastructure” that will be funded with more taxes, local borrowings (treasury bonds and treasury notes) and foreign loans.

Disclaimer: The views in this blog are those of the blogger and do not necessarily reflect the views of ABS-CBN Corp.