Did the economy really slow down?

The economy’s slower 4.9 percent annual growth in the first quarter (from 8.4 percent in the same period last year) highlighted the recent release of the first quarter economic growth data. While a slowdown was widely expected, especially given the artificial nature of last year’s election-spending-driven growth, the news still came across somewhat negatively. And yet, this need not be so. On closer examination of the detailed report from the National Statistical Coordination Board (NSCB), I have come to the conclusion that there’s more good news than bad therein.

I will focus on the point that it’s not exactly correct to say that the economy slowed down. It might come as a surprise if I say that, as a matter of fact, it actually sped up, growing faster than it did in the past two quarters, suggesting that the economy, rather than slowing down, is on an acceleration mode. To see this, one must look at the largely ignored quarter-on-quarter (as against year-on-year) growth rate of the economy, which the NSCB reports in a table buried in the volume of statistical tables making up the report. We, along with a number of other countries, customarily measure and report economic growth by comparing the most recent quarter with the same quarter last year (giving us the “year-on-year” growth rate). That directly yields an annual growth figure, which is convenient as people are more familiar with growth expressed on a yearly basis.

There is a problem with that approach, however. If there was abnormally higher growth a year ago, the growth rate measured this year will suffer from the so-called “base effect.” That is, if we’re growing from an abnormally higher base a year ago, the growth rate will come up lower than otherwise. And there’s no question that the first quarter growth last year was anything but normal. Government consumption spending grew then at a highly unusual 21.4 percent, after averaging only 5.6 percent in the preceding six years.

The data tell it all: the Arroyo administration really went to town leading up to last year’s elections. It did perk up the economy, to be sure, but in a one-off surge of growth that was impossible to sustain. And so, as P-Noy (President Benigno Aquino III) took over, he was forced into deep spending cuts manifested in a more than 6 percent drop in government consumption spending and an even deeper cut (19 percent) in government construction spending for the rest of the year. Luckily, this was more than offset by a strong vote of confidence from the private sector, which boosted construction activities in the latter half of last year by over 30 percent, and investments in equipment by 20 percent.

What about quarter-on-quarter growth? The US, Japan, Canada, the United Kingdom and Australia (among others) measure and report their respective economies’ growth in this manner, as it gives a more real-time picture of the economy’s performance. The first quarter of 2011 actually saw the Philippine economy grow by 1.9 percent over the immediately preceding quarter. This is a surge, compared to the 0.5 and 0.3 percent quarter-on-quarter growth posted in the preceding two quarters.

I must note two things here. First, these quarterly growth figures reported by the NSCB are already corrected for any seasonal effects, which is necessary because certain recurring seasonal factors influence the level of economic activity in different quarters of the year. The third quarter, for example, typically sees a hike in production as producers gear up for larger demands during the Christmas season. Similarly, agricultural output would naturally be higher during regular harvest seasons. On the other hand, the first quarter is normally considered slow as people recover from a spending surge in the previous quarter. All these seasonal effects must be “ironed” out of the data to make the quarters directly comparable—and that is what the statistical authorities do when they report the quarter-on-quarter data.

Second, it is useful to convert these quarterly growth figures to the equivalent growth rate for a whole year (“annualize” them) to put them in more familiar terms. There is a mathematical formula for doing this that I will not bore the reader with, but multiplying the number by 4 (i.e., 4 quarters in a year) is a good enough approximation, although still an underestimate. In any case, the first quarter’s 1.9 percent growth translates to an annual growth of 7.8 percent, even faster than last year’s full-year growth of 7.3 percent. Previous to that, the economy actually grew at annualized rates of only 2 and 1.2 percent. It is not inaccurate to say, then, that our economy actually sped up, rather than slowed down, the lower year-on-year growth rate notwithstanding.

There’s more good news. Certain key industries actually improved on their performances last year, based even on year-on-year figures. Job-rich agriculture (up 6.4 percent) made a dramatic turnaround from last year’s El Niño-induced contraction. Mining and quarrying (18.6 percent) also bested last year’s first quarter and full-year growth. So did transport services (11.3 percent), especially air transport (a whopping 39.3 percent). The industry sector as a whole (made up of manufacturing, mining, construction and utilities) grew quarter-on-quarter by 3.2 percent, equivalent to a zooming 13.4 percent annual growth rate. Meanwhile, overall investment zoomed at 37 percent, far better than last year’s already impressive surge.

If our economic managers are not inclined to scale down their ambitious growth targets for this year just yet, I can understand why.

* * *

E-mail: [email protected]