Why the slowdown?

The first-quarter economic growth figures announced last week disappointed many, including the country’s economic managers. The 6.4-percent gross domestic product (GDP) growth was shy of the lower end of the government’s projected or target range of 6.5-7.5 percent for the year. It was also significantly below the 6.8-percent growth rate in the same quarter last year.

Most of us expected better numbers.

After all, we’ve been hearing the government proclaim dramatic hikes in infrastructure spending (on a “Build, Build, Build” mantra), and in government spending in general, to stimulate more growth in the economy. We’ve also been told of billions of dollars in new investments coming in as a result of the President’s trips abroad—though we really shouldn’t expect that to show up immediately. We’ve seen export growth hit double digits again since the start of the year, after 17 months of continuous decline since two years ago. Recently, we heard how agriculture reversed last year’s decline with a 5.9-percent growth, which is hefty by historical standards. There seemed so much reason to expect the growth numbers to be better than they were.

So why the reported slowdown? A close examination of the growth data released last week by the Philippine Statistics Authority reveals three sobering facts:

First, government spending actually slowed down drastically. For all the bravado about government spending hikes to perk up the economy, the numbers actually show the reverse. Government consumption spending grew by 7.8 and 8.4 percent in 2015 and 2016, respectively, but barely inched up by 0.2 percent in the first quarter this year. Public-construction spending grew by a hefty 19 and 28 percent in the past two years, but grew only 2 percent in the first quarter. Even government services, largely measuring aggregate salaries paid to government employees, grew by 7.2 percent in 2016, but by only 5.5 percent in the first quarter. Is this a case of “the spirit is willing, but the flesh is weak”? Budget Secretary Ben Diokno has been forthcoming about
allocating much larger budgets and willing to incur larger government deficits for the sake of growth. But it appears that the implementing agencies—especially those in transport and public works—have so far not been up to the challenge. The numbers clearly show it.

Second, total investment has slowed down. Fixed capital formation—the sum total of foreign, domestic, private and public fixed investments—posted 15.2 and 25.2 percent annual growth in 2015 and 2016, respectively. First-quarter growth, while still brisk at 11.8 percent, was significantly slower. A key factor that slowed it down was, again, public construction, which ground down to just 2-percent growth from a zooming 38.5 percent in the same quarter last year. Durable equipment investment was the other dampener, with its 37.4-percent growth in the first quarter last year cut to only one-third, at 12.5 percent. Investments in private construction, intellectual property products (e.g., software) and breeding stock and orchard development have been steady (at 11.9, 27.2 and 3.1 percent, respectively), hence are not the source of the investment slowdown.

Third, household consumption also slackened. From 6.3- and 7-percent growth in the past two years, it slowed to 5.7 percent in the first quarter. Faster price increases appear to explain this, as the inflation rate has more than tripled to 3.4 percent in recent months, from around 1 percent in the comparable period last year. The government blames higher food prices, tracing it to restrictive food trade policies. Being dominant in the average household budget, higher food costs crowd out purchases of other things as well. And as the poor are
the hardest hit by food price increases, the lesson ought to be clear.

And so, even with the welcome turnaround in agriculture, slowdowns in industry and services ended up negating it, due to the drags on the demand side. The directions are clear as day: Infrastructure implementation must improve and follow the hype; business confidence must be sustained to keep real investments growing; and food prices must be kept stable and affordable.

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