Sources of the slowdown

It was no surprise that the economy slowed down in the first quarter. It was widely expected, in fact. What seemed unexpected was the degree of the slowdown. After a brisk 7.2-percent gross domestic product (GDP) growth in 2013, most analysts were looking at slightly over 6 percent. Thus, when the Philippine Statistics Authority announced last week that their preliminary estimates show the economy growing by 5.7 percent in the first quarter, the news was somewhat of a letdown. Well, it need not be. Notwithstanding the first quarter data, government remains confident that GDP, which measures aggregate production and incomes in the economy, will grow by 6.5 to 7.5 percent this year. I continue to bet on sustaining or exceeding last year’s 7.2-percent growth rate. Upon examination of the more detailed data, I see clear indications that this remains within reach.

What really slowed the economy down? Commonly presumed to be the main culprit is Supertyphoon “Yolanda” and other recent natural calamities that hit the Visayas and Mindanao in the latter part of last year. But the data seem to suggest otherwise. If it were indeed mostly Yolanda, one would expect agriculture to have been the primary casualty of such calamities. But apart from 6- and 4.5-percent declines in coconut and coffee production respectively—with the latter crop not really prominent in the Yolanda-affected areas—growth in total agricultural output, albeit meager at 1.5 percent, was actually better than its full-year 2013 growth of 0.9 percent. Rice actually grew by 3.3 percent, better than its full-year growth of 2.2 percent last year.

Among industries, the single most prominent reversal was in construction, particularly in private construction. Public construction, with a hefty 22.3-percent growth, actually improved on its 14.9-percent full-year growth in 2013. Reconstruction activities in the disaster areas may have already figured in this. But the spoiler was private construction, which fell by 6 percent, reversing its 33.3-percent first-quarter surge last year and a 9.3-percent full-year growth. Indeed, data from recent quarters show that growth in private construction has been tapering since late 2012, when it peaked at 44.1 percent. I’d like to take this to mean that greater realism now marks the property development industry, negating fears of a bursting property bubble similar to what hit Thailand in 1997. What seems apparent from the private construction slowdown is that private reconstruction in the Yolanda areas has yet to pick up and show up in the data. Reports of shortages in construction materials in these areas that need them most at this time would be consistent with this picture. In effect, one of the seven drivers of 2014 growth that I cited in a recent article has yet to take effect, and will only boost the growth numbers in succeeding quarters.

Another source of the slowdown was manufacturing, whose growth moderated to 6.8 percent following last year’s double-digit 10.3 percent. The main dampeners in the sector appear linked to the construction slowdown, with basic metal industries and nonmetallic mineral products falling by 29.8 and 20.2 percent, respectively. Much smaller declines were recorded for wearing apparel (-6.3 percent), petroleum and fuel products (-2.2 percent), miscellaneous manufactures (-2.1 percent) and food manufactures (-0.3 percent). The last could be Yolanda-related, as coconut oil and copra oil/cake exports dropped heftily by 39.2 and 38.2 percent respectively, which is also consistent with the 6-percent drop in coconut production mentioned above. But the more serious blow to the coconut industry has come from a fast-spreading pest infestation that has been killing large numbers of coconut trees nationwide, and demands urgent decisive action from agriculture authorities.

On the expenditures (demand) side, investment spending was the main source of slower growth. But apart from falling private construction, the main factor that slowed down investment growth overall was actually a large drawdown in inventories. This simply means that production within the quarter failed to keep pace with actual demand, forcing large withdrawals from inventory amounting to P36.7 billion. Demand was obviously boosted by the needs of disaster-stricken areas, but more importantly, by the dramatic turnaround in export demand, which grew 12.6 percent in a dramatic reversal of last year’s decline (-10.6 percent). Note that the logical response of producers to such inventory drawdown is to step up production in the succeeding periods, both to catch up with increased demands and to replenish inventories. This can only mean stronger growth ahead.

The rest of the numbers in fact tell me that the economy’s growth prospects remain strong. Growth in durable equipment investments actually doubled up to 21.6 percent from last year’s 10.4 percent. The rest of manufacturing continued to grow briskly, notably furniture and fixtures (92.5 percent), machinery and equipment (65.4), fabricated metal products (50.7), textiles (36.1), office equipment, transport equipment and many others. Apart from the export turnaround, household consumption growth picked up to 5.8 percent from 5.5 percent last year. Government spending was clearly slowed down by increased cautiousness due to the pork barrel scandal. But this is bound to pick up again given government’s strong financial position, and its expressed determination to hike infrastructure spending to nearly double its current pace.

All told, then, the first-quarter slowdown looks to me more like a temporary setback.

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