Q2 GDP growth slowest in four years as delayed budget bites

By Christine J. S. Castañeda
Senior Researcher

THE ECONOMY expanded at its slowest pace in 17 quarters in the April-June period, weighed down by reduced private investments as well as tempered household and government spending, the Philippine Statistics Authority (PSA) reported on Thursday.

Gross domestic product (GDP) — the value of final goods and services produced within the country’s borders — grew by 5.5% last quarter, slower than the 5.6% in the first quarter and 6.2% in the second quarter of 2018.

This was the slowest expansion since the 5.1% recorded in the first quarter of 2015.

This was also lower than the 5.9% median estimate in ����ý’s poll of 15 economists and institutions last week.

GDP growth averaged 5.5% last semester, slower than the 6.3% in 2018’s first half and the 6-7% target set by the government for 2019.

Socioeconomic Planning Secretary Ernesto M. Pernia said in Thursday’s press briefing that the weaker-than-expected second-quarter economic performance reflected the “continuing effect” of the delay in enactment of the P3.662-trillion 2019 national budget, coupled with the March 29-May 12 ban on new public works ahead of the May 13 mid-term elections.

Mr. Pernia, who heads the National Economic and Development Authority (NEDA) as director-general, said that in order to reach the low end of the government’s 6-7% growth target, the economy would have to grow by an average of at least 6.4% this semester.

To recall, 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. The Budget department said in a press release on Thursday that it has released P3.263 trillion, or 89.1%, of the delayed budget.

“Based on our estimates, if we had spent according to the fiscal program, growth would have been at least one percentage point higher (for the first two quarters),” NEDA Undersecretary Rosemarie G. Edillon said in a Q&A with the media in yesterday’s briefing.

On the supply side, industry and agriculture sectors dragged GDP growth.

The industry sector grew by 3.7% in the second quarter, slower than the past year’s 6.5%.

Meanwhile, the agriculture, hunting, forestry and fishing sector grew by 0.6%, slower than the 0.7% growth in the first quarter albeit a tad faster than the 0.3% growth netted in the second quarter of 2018.

On the other hand, services bucked the trend with a 7.1% expansion, faster than the 6.8% in the first quarter and 6.7% last year.

In an e-mail, Rizal Commercial Banking Corp. (RCBC) economist Michael L. Ricafort said that the services sector “continued to remain resilient” partly due to the pickup in the growth of remittances from overseas Filipino workers, the “sustained growth” in the revenues of business process outsourcing (BPO) firms, “strong” employment data, and “continued growth” in corporate earnings and tourism receipts.

On the demand side, growth in government spending was at 6.9% in the April-June period, decelerating from the 7.4% growth the previous quarter and 11.9% last year.

Household spending also decelerated, growing by 5.6% during the period from the first quarter’s 6.1% and last year’s six percent.

“Household spending, which accounts for the lion’s share of economic growth, failed to offset [the] contracting capital formation… even as inflation remains in a downtrend,” ING Bank Manila senior economist Nicholas Antonio T. Mapa said in a note to reporters.

“Elevated borrowing costs continue to divert disposable income from consumption to higher interest expenses.”

Trade continued to drag the economy as growth of exports of goods and services slowed to 4.4% in the second quarter from 14.7% in the same period last year. Meanwhile, growth of imports of goods and services was muted at around 0.04% from last year’s 21%.

Private investment — which is represented in the national accounts as capital formation — declined by 8.5%, reversing from expansion of eight percent and 20% in the first quarter of 2019 and second quarter of 2018, respectively.

The last time capital formation dropped was in 2012’s second quarter, when it contracted by 7.7%.

Fixed capital — which is under capital formation and includes investments in construction and durable equipment among others — declined by 4.8% in the second quarter, marking its first drop since the 3.6% contraction posted in the fourth quarter of 2011.

“… [The] [c]ontraction in capital formation may be attributed to the continuous declining trend in both inflation and interest rates, which prompted some local and foreign businesses to wait for prices and borrowing costs to go down further before [becoming] more aggressive… to finance new investments,” RCBC’s Mr. Ricafort said.

In a note to reporters, HSBC Global Research economist Noelan C. Arbis said that the second-quarter reading “painted a clear picture that weak investment is dragging the Philippine economy.”

“[T]he slowdown in investment was even more pronounced than we anticipated, contracting for the first time since 2011,” Mr. Arbis said.

Gross national income — the sum of the nation’s GDP and net income received from overseas — grew by 5.1% in the April-June period compared to 5.9% in the 2018’s comparable three months.

OUTLOOK
With the disappointing economic growth in the first half, economists anticipate growth in the second half to pick up.

“We forecast full-year GDP growth of six percent in 2019, implying an acceleration of growth in the second half, although a weaker-than-expected bounce in infrastructure spending poses downside risks,” HSBC’s Mr. Arbis said.

Meanwhile, RCBC’s Mr. Ricafort said that the low-end of the GDP growth target this year “remains achievable” with government and household spending expected to accelerate, coupled with growth in exports, remittances, tourism and BPO revenue.

Capital Economics’ Asia economist Alex Holmes was of a similar assessment. “[A] recovery in growth is likely in the second half of this year. However, with the economy facing a number of headwinds, we don’t expect the rebound to be very strong,” he said in a research note.

In a separate note, J.P. Morgan economist Sin Beng Ong said that capital expenditures (capex) “remains key” for the second half of this year.

“While we expect that capital spending should recover in [the second half of 2019] as public spending projects are accelerated, the risk is that seasonal issues around weather could hinder the extent of the infrastructure and capex lift,” Mr. Ong said.

“If the capex trajectory turns out to be less than expected, this would suggest a narrower current account deficit and a greater inclination to ease monetary policy compared to our baseline of two 25bp cuts in [the second half of 2019]…”

Hours following the release of the GDP data, the Bangko Sentral ng Pilipinas’ (BSP) Monetary Board decided in its fifth policy review for the year to cut benchmark interest rates by 25 basis points, bringing the BSP’s overnight reverse repurchase facility to 4.25%, its overnight deposit facility to 3.75% and overnight lending facility to 4.75%.

“With growth threatening to slide below six percent for the year and inflation in check, the BSP will need to consider walking back last year’s ultra-aggressive rate hike to help provide the economic boost all the more with clear and present global headwinds darkening ahead,” ING’s Mr. Mapa said.