It’s not as bad as it looks

The third-quarter gross domestic product (GDP) results were released last week. While the numbers are disappointing, the Philippines is still one of the fastest-growing economies in Asia. We were behind Vietnam, which recorded a growth of 7 percent during the quarter, and China at 6.5 percent, but the Philippines was ahead of the others.

Philippine GDP growth was registered at 6.1 percent in the third quarter, its slowest quarterly growth so far this year, and in the past 27 quarters. This brought the average economic growth to 6.3 percent in the first three quarters, down from 6.8 percent in the same period last year.

Inflation — which rose beyond expectations to nine-year highs in the third quarter — was almost singularly blamed for the slowdown in the economy. It dragged household spending down, especially in 3Q18 when it was particularly at its weakest at 5.2 percent. The central bank reported that consumer confidence returned to negative territory (which meant more families felt their job, financial and income situation turned for the worse than those who felt they did better) for the first time since the second quarter of 2016. Social Weather Stations, meanwhile, revealed that the ranks of families who considered themselves poor swelled further to a totally unacceptable 52 percent, its highest since the third quarter of 2014.

It appears that inflation has already peaked — it was 6.7 percent in October, the same pace as September — with world crude oil prices dropping, the peso recovering sharply versus the dollar starting November, farm good prices back to their normal trend, and with central bank measures helping contain the second-round effects of the cost-push inflation.

In contrast, fixed investment increase was stronger at 15.3 percent in the first three quarters of this year from 9.5 percent a year before, with boosts from the government’s “Build, build, build” program.

Exports also started to pick up in the third quarter at 14.3 percent, after a weak start in the first half. But the higher rate of growth of imports at 18.9 percent in the third quarter outpaced exports, posting a drag on economic growth as imports subtract from GDP growth. Although the faster pace of imports has a positive impact on the economy over the medium term, its effect on the current account balance still has to be managed, as this is a drain on the country’s foreign exchange reserves, and it increases the volatility of the domestic financial market and the exchange rate.

The industrial and service sectors did well, duplicating their lofty performance last year, with increases of 6.8 percent and 6.9 percent, respectively, in the first three quarters. Construction (up 13.3 percent) boosted industry, while real estate (up 11 percent) and government’s frontline services (up 7.1 percent) gave strength to the service sector.

In essence, a closer look at the economic slowdown does indicate things are not as bad as they seem in people’s day-to-day life. The higher cost of food and oil is distorting our impression of the economy. The industrial boom is continuing, supported by massive construction activity, and the service sector is gaining in resilience despite IT-BPM slowing — a slowdown whose reasons need to be carefully assessed by the government’s economic team, so short-term disruptions like inflation need to be better managed.

The real weakness is agriculture. It’s quite simply in decadeslong disastrous shape, and can’t even keep up with the growth in our population. This is the economy’s weakest link. It needs much, much stronger policy support and forthright action, as this is perhaps the key to the Philippines being able to sustain growth in the 7-percent range, and get that 52 percent of the population out of poverty.

With inflation becoming less of a threat, and election-related spending starting to take shape, GDP should be expected to rally in the fourth quarter. The Wallace Business Forum’s forecast of a 6.5-percent growth for the whole of 2018 is still on track.

What I’m trying to say in these recent columns is that we have problems today that are worrying many as they impact on their daily lives, all narrowly concentrated on the cost of food and fuel. But these are short-term problems. In the longer term, they’ll be absorbed, and there will be recovery as the economy is fundamentally strong.

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