Why the second half will be better

It will be another week before the official third quarter economic growth figures will be announced by government statisticians. But judging from the bits and pieces of newest data that have been coming out, we can be reasonably confident that the dramatic slowdown that marked the second quarter is now behind us. The full-year performance of the Philippine economy should be quite respectable in fact, especially in the face of the pressures coming from troubled economies in Europe and persistent sluggishness in the US economy.

There are at least three important reasons for this positive outlook. One, the numbers show that government has been addressing the main culprit that led to the drastic slowdown of the second quarter, which was government infrastructure spending. Two, the agriculture data for the first three quarters are already in, and the numbers continue showing robust growth even in the face of recent calamities that hit certain production areas. Three, “leading indicators” of economic performance that are systematically tracked by government statisticians suggest a clear speeding up in the third and fourth quarters of this year. Let’s have a look at each one in turn.

The latest data on government revenues and spending tell the story of a deliberate catch-up. As of end June, total government spending stood at P698.9 billion, representing a rather hefty drop of 11.4 percent from the corresponding figure of P788.8 billion last year—a figure, it must be emphasized, that was bloated by an unusually high level of election-related spending, even compared to other election years in the past. But now the July-September (third quarter) data tell a different story. Government spending for that period stood at P371.2 billion, already 1.5 percent higher than last year’s P365.7 billion.

Looking cumulatively at all three quarters combined (that is, January to September), the total drop in government spending has been whittled down to 7.3 percent. And given the announced P71-billion fiscal stimulus package, the government may yet succeed in catching up with last year’s spending levels by year’s end, with a very important difference: The leakages due to corruption in this year’s budget releases should be far less than before, given the government’s deliberate (some even say excessive) efforts to weed out corruption-ridden projects.

And even as spending was lower in the first three quarters, revenues were up by 13.7 percent, indicating that government has been achieving much more financial elbow room in the past year. This revenue growth is remarkable, because even after discounting inflation of 4.5 percent, growth in collections by the Bureau of Internal Revenue and Bureau of Customs have well outpaced the economy’s overall growth even without any new taxes, indicating that they must be doing something right.

The Bureau of Agricultural Statistics recently announced that agriculture, fishery and forestry production grew by 4.3 percent in the first three quarters of the year, led by crop production, which grew by 9 percent. This means that growth in the sector outpaced overall growth as of the first half of the year. Better growth in the sector is always welcome news because together with services, the agriculture sector provides a major chunk of the jobs in the economy. Our major crops, palay and corn, each grew by a hefty 16 percent, while sugarcane jumped by 77.8 percent. These brisk growth rates more than offset some declines seen in other crops such as coconut, mango and coffee, and outpaced more moderate gains also posted by banana, rubber, cassava, abaca, livestock, poultry and others. As I pointed out in this column before, both agriculture and services actually sped up in the second quarter despite the aggregate slowdown; hence, better growth had actually been occurring where it was needed most.

For some time now, the National Statistical Coordination Board (NSCB) has been tracking 11 economic variables, which through many years of observation have proven to be good predictors of overall economic growth. These are: (1) new business start-ups, (2) visitor arrivals, (3) consumer price index, (4) hotel occupancy rates, (5) foreign exchange rate, (6) stock price index, (7) electric energy consumption, (8) total merchandise imports, (9) wholesale price index, (10) terms of trade index, and (11) money supply. By observing up-to-date data on these variables and combining them into a composite index, the NSCB is able to use these “leading economic indicators” (LEI) as a reliable gauge of how the overall economy is growing. The good news is that the composite LEI index for both the third and fourth quarters of the year show continuous acceleration. What this suggests is that growth of the economy has been speeding up, based on current trends in these leading indicators. And given the demonstrated track record of these leading indicators, the NSCB has been reasonably confident of their reliability as barometers for overall economic performance.

There are more sources of encouragement. The growth in overseas remittances has begun to speed up again (from 6 to 8 percent annual growth)—and we all know how important remittances are in driving the demand for goods and services in our economy. Growth in bank loans has been in the double digits, reflecting the continued surge in private investment spending and confidence in the economy as a whole.

All these point to a better second half. Hardly anyone doubts that by now.

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