Latest economic ups and downs

The Philippine economy, according to the latest data, continues to grow faster than expected. With 7-percent growth posted in the third quarter, this is the fifth quarter in a row that the economy has grown by 7 percent or more. Gross domestic product (GDP) growth averaged 7.4 percent in the first nine months of the year, exceeding the 6- to 7-percent growth target set by government. But we all know that the aggregate growth rate is not enough basis for assessing the state of the economy. More important to many is the quality of that growth, and that is the subject of this article.

Where did the economy’s growth so far this year come from? Where have we done better, and where have we done worse? Is our economy’s growth still too dependent on consumption spending fueled by remittances from overseas? Or is investment becoming a more important source of demand to induce greater production? And finally, was the growth inclusive, that is, did it have wide participation and benefits among Filipinos, especially those with less in life?

I note below three upsides and two downsides in the growth data. I will start with the upsides.

First, exports have gone back to positive growth, having expanded by an encouraging double-digit rate of 10.6 percent in the third quarter, a dramatic turnaround from declines posted in the first two quarters of the year (-7.6 and -6.8 percent). It was remarkable that our economy had managed to grow fastest in the region even with that export decline in the first half. This shows that our brisk growth was internally driven and not dependent on demand for our goods and services by foreigners, whose economies had been faltering since the global financial crisis of 2008-2009. So now that export markets appear to have come to life again, this should be a further boost to our economy in the face of recent setbacks brought about by the Bohol earthquake and Supertyphoon “Yolanda.”

Second, fixed investment spending has continued to accelerate, growing at 14 percent in the first nine months of the year, almost doubling its 7.2-percent growth in the same period last year. Driving this are investments in durable equipment, which grew by a hefty 22.3 percent, coming from expansions in transport equipment (38.2 percent) and industrial machinery (12.4 percent). The former was driven primarily by new purchases of aircraft (2,290 percent) and railway transport equipment (25.2 percent). The continued pick-up in investment spending is reassuring, as it means we are speeding up on building more productive capacity, thereby paving the way for even more and faster future growth.

The third key upside trend is the seeming re-balancing of the economy toward growth increasingly driven by industry, rather than services. The industry sector accelerated to 8.2 percent in Q3 from 7.1 percent in the same quarter last year. Meanwhile, the services sector had slowed down to 7.5 percent from 8 percent. Taking the first nine months together, industry growth was at 9.8 percent, against 6.1 percent in the same period last year. In particular, manufacturing further expanded by 9.8 percent, significantly speeding up its 5.4-percent growth last year. Growth leaders in manufacturing were chemicals and chemical products (84.8 percent), basic metal industries (64 percent), furniture and fixtures (25 percent) and nonmetallic mineral products (14 percent). It is also heartening that manufacturing appears to be seeing greater diversification away from the traditional dominance of food manufactures.

On the downside, agriculture fell slightly in Q3 (-0.3 percent), leading to a virtual standstill for the first nine months (0.4 percent). While sugarcane and cassava grew 24.1 and 12.1 percent respectively, production of most other agricultural products went down. Coffee, rice and banana were the key casualties, falling by 15.8, 6.5 and 6.4 percent respectively. Weather was mainly to blame; note that the country has gone through the entire alphabet of typhoon names this year (from Auring to Zoraida), taking a heavy toll on agriculture—and the year isn’t over yet. The last time we went through the whole alphabet was 20 years ago in 1993, with 36 typhoons recorded. Government believes that the combined impact of natural calamities this year would chip around 0.5 percentage points off the full-year real GDP growth rate.

The other not-too-positive news is the significant slowdown in construction growth in the third quarter. It had been posting double-digit growth for five quarters, and exceeded 30 percent in two of those. However, construction dramatically slowed down to a more subdued 4.2-percent growth in Q3, mainly dragged by private construction, which barely grew at 0.6 percent over the same quarter last year. Whether this will be a sustained slowdown or was just a temporary respite due perhaps to bad weather remains to be seen. Even then, public construction continued to grow at a brisk 23.9 percent, reflecting government’s continued efforts to catch up on its infrastructure program, especially after falling dramatically in 2011.

Has growth been inclusive? The fastest-growing sectors (translation: those where incomes are growing fastest), with growth rates exceeding 15 percent, have consistently been financial services (banks and insurance) and real estate, renting and business activities (which includes business process outsourcing). At the other extreme is agriculture, on which the bulk of our rural population, and on which the jobs of an estimated two-thirds of our workers depend directly or indirectly; here, outputs and incomes shrank. That should be clue enough.

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