ANALYSIS: Economic growth slower despite rising gov’t spending

Jose Galang — Your Business

Posted at Nov 16 2017 10:12 PM

When the Duterte administration presented to Congress a budget of P3.35 trillion for 2017, its economic managers projected that such a higher level of spending—11.6 percent more than the previous year—will propel economic growth to between 6.5 percent and 7.5 percent.

As of end-September disbursements made under the budget program have exceeded 60 percent of the total allocations and economic growth is running at an average 6.67 percent, just above the low end of the target range. The three-quarter average growth this year was also slower than the year-ago 7.03 percent, data from the Philippine Statistics Authority show.

For the full-year growth in the gross domestic product (GDP) this year to hit the top end of the government’s target of 7.5 percent, it will have to register a 10 percent for the fourth quarter. That looks like a tall order indeed.

Even just trying to equal the 2016 full-year growth of 6.9 percent would require a fourth-quarter spurt of 7.6 percent—which is still unlikely given that fourth-quarter growth rates are usually lower than third-quarter levels and that since 2000, the only time fourth-quarter growth hit 7 percent was in 2011 (7.0 percent) and 2015 (7.1 percent).

Clearly, the Duterte economic managers will have to do better if their goal of achieving inclusive growth is to be attained. A disproportionate emphasis on an extravagant build, build, build program—being anchored on a heavy debt to be secured from various local and international sources—does not seem to be driving growth, as seen from the latest government data.

Growth winners

The third quarter growth of 6.9 percent, even if it was slower than the year-ago 7.1 percent, has its winners. Manufacturing output rose by 9.4 percent, lifting the sector’s production in the first three quarters of this year by 8.3 percent, a significant climb from 7.0 percent in the comparable period last year.

But much of that activity came from food manufactures, which accounted for nearly a third of all manufacturing output. Another big source of growth was from producers of radio, television and communication equipment and apparatus, which contributed a fifth of all manufacturing production. Whether these comprise foundations for a lasting growth in manufacturing is highly doubtful.

Manufacturers of such goods as basic metals, non-metallic mineral products, fabricated metals, electrical machinery and non-electrical equipment and machinery—from which new industries can be built—had a combined share of just over 12 percent of total manufacturing output in the first three quarters. Nonetheless, the combined real growth in these goods was 19 percent from a year ago, compared to 5.9 percent in food manufactures and 10.4 percent in communication equipment.

In the construction sector, the private sector still accounted for 74 percent of activity in the first three quarters, but real growth in public sector construction was faster at 10 percent, compared to 5.8 percent in private construction.

If this is a mark of the build, build, build initiative, it certainly still has a long way to go to pace economic growth. The faster growth in government construction activity also does not seem to rhyme with the flow of spending that has resulted in a substantial fiscal deficit.

Slower sectors

Now comprising nearly half of the economy, the service sector cooled down in the first three quarters, growing by 6.7 percent compared to 7.5 percent last year. The biggest source of activity in this industry—trade and repair of motor vehicles, motorcycles, and personal and household goods—grew by 6.6 percent in the 2017 first three quarters, slower than the year-ago 7.5 percent. Also a big service industry component—real estate, renting and business activities—slowed from an 8.8 percent growth last year to 7.8 percent this year.

Consumption expenditure, which has been a key driver of overall economic growth in recent years, has significantly slowed this year. After a gradually declining in each of the first three quarters, growth in household consumption expenditure settled at an average of 5.4 percent. In the same period last year, growth was 7.3 percent.

Consumer prices have risen significantly since the start of the year, partly caused by costlier production costs by makers of consumer goods having to contend with a lower value of the peso against foreign currencies and the rising prices of fuel and transport. Analysts have been pointing out that the escalating rate of inflation could, if not curtailed, impact on the overall economic productivity.