With the elections over and clear mandates settled, governance should go back at looking at the economy.
Last week, the Philippine Statistics Authority (PSA) announced the first quarter gross domestic product results. The GDP growth was below analysts’ forecasts but was not unexpected. The main reason for the slowdown on top of everyone’s mind is the delay in the approval of the 2019 budget. This, too, was the reason cited by the government. In fact, the economic managers claimed that the first quarter GDP should have grown by a full percentage higher, to 6.6 percent.
Looking at the details of the GDP report, it shows that the budget delay is not the only reason for the growth decline. The growth slowdown looks to be broader than just those directly affected by government spending. We based this observation by looking at the average first quarter growth in the last eight years. This covers at least two election periods (2013 and 2016) and one of the strongest El Niño weather phenomenon occurring during 2015-2016. This data provides us the potentials of the different GDP components and their seasonality. First analyzing the production-sectoral contribution, both agriculture and industry reflected slowdowns. Agriculture is expectedly slower due to the effects of El Niño. Industry, however, was affected by slower manufacturing and construction growth. Their performance was much lower than their eight-year averages. Both manufacturing and construction account for 25 percent and 6 percent, respectively, of total GDP. Historically, the first quarter performances of these two sectors are as fast as their second quarter growth. The decline in construction is directly linked to the budget delay with public construction contracting by almost 9 percent compared to a year ago. This was the first contraction of public construction since 2014. Turning to manufacturing, food manufacturing which is the biggest manufacturing component actually grew by 11 percent, its fastest since 2012. However, other components reflected slower growth or contraction after posting double-digit growths in 2018, notably those related to exports such as machineries and furniture. Meanwhile, services led by trade and transport subsectors grew faster as the impact of inflation in 2018 starts to dissipate.
Consistent with the faster growth in services trade is the faster growth of household consumption. This is an indication of income recovery after the period of high inflation last year. It is also possible that the early period and preparations for the elections also helped in a higher household expenditure. Contrary to what the government was saying about the impact of the delayed budget, government expenditures actually grew faster than its eight-year average. This implies that government was able to carry many of its commitments despite the budget delays. The impact of the delay is mainly in the public infrastructure but not in overall government activities. This is also corroborated by the stronger growth of public administration services. What may have pulled down overall growth is the slowdown in investments and trade. Investments, which has been growing double digit in the last eight years, has been slowing down since the fourth quarter last year and this is due to the slowdown in durable equipment. Durable equipment growth is seen normalizing either due to most of the needed equipment are already in place or that current equipment capacities require the infrastructure that are yet to be completed. Similarly, the trade slowdown is reflected in both exports and imports reflecting lower single digit growths. For a country like ours, which is strongly connected to the global value chain, the external factor plays a role in how we participate in international trade. With the uncertainties brought by the trade wars, it is possible that demand for international products are in a wait and see attitude last quarter. With the decision of US and China to escalate the tariffs, it is possible that trade will at best remain at current levels.
The budget was finally passed in the middle of April. Combined with the traditional stronger household and government consumption during elections, it is possible that growth could be faster the second quarter. However, it is not enough to put the efforts of a faster growth to the government. El Niño and the trade wars are external factors beyond our control, but to generate more jobs and investments is still within the purview of the private sector. A wait and see attitude at this point will only create further slowdown. The results of the elections should already move policy- makers to make the economy return to its faster growth path. With an overwhelming majority in both houses of Congress, a lot of uncertainties should now be removed. It is important that the infrastructure program remain on track and a significant portion be completed by 2022. Realistically, GDP growth this year has already slowed and we have adjusted our full year estimates to 5.9 percent from 6.3 percent. This can still go back to the 6 percent range especially as inflation starts to decline and with it, interest rates. But a lot depends on our confidence in our economy beyond today.