A strengthened economy?

I ended last week’s article on the question of whether the quality of our economy’s growth is really getting better, in light of the good news on jobs from the April 2014 Labor Force Survey (LFS) reported by the Philippine Statistics Authority. I withheld a verdict because the July jobs data were due shortly but not yet out then. They are now, and the happy news is that the good jobs performance was sustained through the second quarter. The new data report 1.06 million net new jobs generated between July 2013 and July 2014, again well exceeding the number of new entrants to the labor force in the same period (numbering 889,000). The unemployment rate has thus broken below the 7 percent mark and now stands at 6.7 percent. With the employment situation continuing to improve, this could indeed be indicative of fundamental strengthening of the economy.

Is this borne out by other economic data? The recently reported 6.4-percent gross domestic product (GDP) growth our economy posted in the second quarter (Q2) merits a closer look. I was at first not too pleased with the news upon its release even as it reversed the Q1 slowdown to 5.6 percent, for two reasons. First, it was still significantly slower than last year’s 7.2-percent full-year growth. Second, I’ve had a running bet for a free lunch with a fellow columnist (in another paper), Romy Bernardo, that our economy could sustain or even improve on last year’s growth performance. Lately, he has challenged me to raise the bet to dinner in Hong Kong, emboldened by the succession of recent adverse developments that support his more conservative outlook of around 6 percent. Among these are undue delays in the “Yolanda” rehabilitation and reconstruction effort, the adverse Supreme Court ruling on the Disbursement Acceleration Program (DAP), the severe port congestion triggered by the months-old Manila truck ban and paralyzing traffic congestion in the metropolis.

Still, I’m not about to concede the bet just yet. In order to match last year’s full-year growth of 7.2 percent, given that first semester growth averaged 6 percent so far, we need to grow in excess of 8 percent in the remainder of the year. Is this out of the question? Not necessarily. It’s a tall order, but it’s not statistically impossible. Our economy had actually done it not too long ago, specifically in 2010 (when we grew 8.4 and 8.9 percent in Q1 and Q2, respectively), and in Q2-2007 (8.3 percent)—albeit in election campaign periods. What’s more, I’ve noted certain trends worth cheering about, upon closer examination of the more detailed tables of the Q2-2014 National Income Accounts (which I received over the weekend, thanks to the intervention of former National Statistical Coordination Board secretary general Dr. Romy Virola). For one thing, the second quarter actually saw the economy posting its fastest quarter-on-quarter growth rate in five quarters (i.e., since Q1-2013). The economy grew in Q2 by 1.9 percent over Q1, adjusted for seasonality; this translates to an annual compounded rate of a hefty 7.8 percent. Note that the widely reported 6.4-percent annual growth rate is the year-on-year rate (that is, compared to the same quarter in the previous year). But many countries, including the United States, Japan, Canada and Australia, focus more on the annualized quarter-on-quarter rate adjusted for seasonality, as it provides a more timely picture of short-term growth trends. On this basis, our economy actually showed significantly more vigor in the second quarter than the year-on-year growth rate suggests.

By the same reckoning, the agriculture sector (including hunting, forestry and fishery) posted its strongest growth in eight quarters (since mid-2012) with an annualized quarter-on-quarter growth rate of 5.3 percent. Industry zoomed at 11.7 percent, based on the same measure. Manufacturing continues to drive this exceptional industrial growth, having sustained its double-digit (10.8 percent) growth rate even measured on a year-on-year basis. And as reported in the LFS, this came with the creation of 92,000 new jobs as of July. From agriculture (including hunting and forestry) came nearly 100,000 new jobs, although this was dampened by the loss of some 39,000 fishing jobs, due primarily to Supertyphoon Yolanda. The share of wage- and salary-paying jobs expanded further to 58.4 percent of all jobs, up from 57.5 percent last April, denoting further improvement in job quality, as the share of unpaid family labor fell from 11.2 to
10.4 percent.

Will all this positive news continue to hold? This is where the downsides in the Q2 data could bear in. The not-so-good news is that capital formation (overall investment) actually fell (-2.4 percent). This was the combined result of declines in government construction (-12.9 percent) and breeding stock and orchard development (-2 percent), and a large drawdown in inventories. The big drop in government construction along with zero growth in government consumption seem to bear out the claimed “chilling effect” on government spending of the adverse Supreme Court ruling on the DAP. Meanwhile, the growth-dampening effect of the Manila port congestion is a real threat, considering that 63 percent of the country’s GDP and 73 percent of all manufacturing output are concentrated in Metro Manila, Calabarzon and Central Luzon.

Clearly, then, salvaging my bet hinges on government’s ability to act fast to reverse largely self-inflicted impediments to sustained strengthening of the economy. This is not the time to lose the momentum.

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