Shrunken spending | Inquirer Opinion
No Free Lunch

Shrunken spending

/ 04:05 AM December 01, 2020

For three successive quarters now, production and incomes have fallen from their year-ago levels, and by all indications, this year’s final quarter will see yet another similar contraction. People had hoped that with the worst lockdowns over, the third quarter (Q3) numbers could have been better than the still deep contraction (-11.5 percent) the Philippine Statistics Authority reported. The economy is down, and the simple reason is people not spending money as they normally do, leading to much lower demand for our goods and services—the demand that leads producers to produce in the first place. To better appreciate what’s happening, let’s take a closer look at our economy’s demand side—that is, those doing the spending in the economy. There are four groups who buy goods and services in any economy: (1) consumers or households; (2) producers (farms and firms), who must buy goods and services in order to operate or raise capacity to produce even more; (3) government, which buys various goods and services in order to operate, respond to people’s needs, and build and repair public infrastructure; and (4) foreigners, who buy our products when we export to their countries, or when they come and visit us.

The problem is that spending has taken a dive in all but one, the exception being government consumption, which necessarily had to increase.


Household consumption spending accounts for the bulk, or nearly half of all purchases of our domestic products, and this dived by a deep 15.3 percent in Q2, and by 9.3 percent in Q3. With people confined to their homes, and with many deprived of their regular incomes by the lockdown, such drastic declines have been no surprise. Worse, hundreds of thousands of Filipino workers were displaced overseas, and aggregate remittances back to their families fell for three consecutive months in March, April, and May. Understandably, the largest declines in consumer spending were in transport, recreation, and restaurants/hotels. But people also significantly cut down on alcoholic beverages and tobacco, clothing, household furnishings, education, and even health spending. But spending continued to grow consistently on the basic necessities of food and housing (including utilities), which together make up over half of total household spending.

Foreigners account for the next largest part (around 30 percent) of demand for our domestic goods and services, through our merchandise and service exports. That, too, was severely depressed by COVID-19, with the drop peaking by more than a third (35.8 percent) in Q2, and still by 14.7 percent in Q3. But what’s more worrying is how our spending for imports fell even more deeply, by 37.9 and 21.7 percent in Q2 and Q3, respectively. This is bad news because the bulk of our imports (more than 85 percent) are actually inputs to production, in the form of capital equipment, fuel, raw materials, and intermediate inputs. Steeply dropping imports will thus translate to steeply dropping production in the months and quarters ahead, and could well be a damper on our hopes for faster recovery next year.


Combined investment spending by private firms and the government, making up about 15 percent of all spending, dived by a whopping 36.5 and 37.1 percent in Q2 and Q3, respectively. While we all thought construction had rebounded somewhat after the lockdowns were eased in July, the numbers show it did the opposite. In fact, government construction spending actually dived by 28 percent in Q3, after growing positively in Q2 by 3 percent when lockdowns were at their worst. Private construction dived even more, by 39 percent in Q3 after shrinking 24 percent in Q2. While we’re pinning much of our hopes on the “Build, build, build” infrastructure drive to propel faster economic recovery, the data show there’s a lot of homework still to be done on this.

Will our economy continue shrinking into next year? It hinges on people’s ability to spend more money, and the confidence to spend it. If we must throw money at the problem, let’s throw it in the right direction, to those who spend the most: displaced income earners who otherwise would be our biggest consumers.

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TAGS: Cielito F. Habito, coronavirus pandemic, coronavirus philippines, No Free Lunch, pandemic economy, shrunken spending
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