Self-inflicted slowdown, again

In eight out of the last 11 years, the economy slowed down in the third quarter. This year’s Q3 slowdown followed the same pattern. Indeed, most analysts and observers expected it, particularly in the face of port congestion issues and the constriction of government spending after the adverse Supreme Court ruling on the Disbursement Acceleration Program (DAP). What was not expected was the severity of the slowdown, with growth down to 5.3 percent, the slowest since 2011 when weak government spending also severely dampened the economy’s growth.

What exactly slowed the economy down? On the supply side, agriculture was the biggest drag, as the sector’s output actually fell by 2.7 percent. Leading the decline was rice, which fell by 10 percent, along with corn and coconut, which both dropped 5.8 percent. But sugarcane actually jumped by a hefty 32 percent, with banana, rubber, cassava and livestock likewise posting positive growth. Meanwhile, services also saw its growth taper from last year’s 7.7 percent to 5.4 percent, hampered by a decline in government services and moderating growth in finance, real estate, transport, communication and other services. On the other hand, wholesale and retail trade actually performed better than last year. Industry sector growth remained consistent, with private construction and mining doing even better than in Q3 last year. While growth in manufacturing and utilities somewhat eased, manufacturing growth so far this year remains better (8.3 percent) than the last four years’ average growth (8.1 percent). And its slight slowdown may be temporary, induced by the impeded flow of imported raw materials due to port congestion in Manila.

The noteworthy story is on the demand side, where the drop in government construction (-6.2 percent) and government consumption expenditures (-2.6 percent) was the clear driver of the slowdown. Just like in 2011, constricted government spending has once again had the effect of stifling the overall economy’s growth, this time affected by the adverse ruling on the DAP. Ironically, it was this same DAP that government had adopted and used successfully to reverse the choking effect of the 2011 spending cutbacks resulting from efforts to curb traditional leakages especially in public works funds. Even so, private construction actually grew at a double-digit rate (15.7 percent) in the third quarter, helping offset the cutback in government construction.

While growth in domestic household spending held steady at 5.6 percent, foreigners’ demand for our export products and services actually swung around from last year’s contraction (-2.2 percent) to a double-digit growth (11.1 percent). And private investment spending continues to be robust. Apart from the healthy private construction growth mentioned above, growth in investment in durable equipment (12.3 percent) and in intellectual property products (22.3 percent) has remained brisk.

The implication of all the above is clear: It was mainly government itself that induced the economy’s slowdown. Government services, government construction and government consumption all fell significantly, even as the rest of the economy was poised for further growth. And even that was dampened by government through missteps like the Manila truck ban exacerbated earlier by an ill-advised crackdown on “colorum” trucks, and persistent shortcomings in managing the agriculture sector. I don’t see weather as the primary culprit here, as typhoons affect our production areas year in and year out, mostly in the third quarter.

The economic slowdown was thus self-inflicted yet again, and could have been avoided had government—and here I refer to all branches and all levels—done things better. The rest of the data suggest to me that the private economy remains on a healthy growth path. I continue to believe that the economy, in spite of government missteps, has attained a new growth trajectory that could hold for a long time, especially if the government finally gets its act together. There are at least three promising bright spots seen in the third quarter data:

One, manufacturing continues its resurgence after more than a decade of relative stagnation. From an average annual growth of only 3 percent in the past decade, it has averaged 8.1 percent in the past four years—faster than the aggregate economy’s growth—and as mentioned above, this year’s average growth so far is even better than that.

Two, foreign direct investments (FDI) are accelerating. The turnaround in confidence of domestic investors that began showing up in the data in 2010 appears to have finally caught on with the more cautious foreign investors as well. After attracting an average of only $1 billion per year in the past decade, we are poised to well exceed five times as much by the end of this year. The bulk of these are in manufacturing, suggesting that even our much-lamented high energy costs may not be as strong a deterrent as widely thought. Not all manufactures, after all, are highly energy intensive.

Three, the economy’s growth is finally translating into more job creation. Unemployment rate is down to 6 percent, and annual net new job creation has well exceeded 1 million for three quarters now. More jobs mean wider purchasing power and more domestic demand that spurs even more production growth. If this holds up, we could be seeing a growth spiral that would put us well on the way to sustained high growth that comes, finally, with poverty reduction as well. What more if government manages to move as one, do things better, and avoid any more self-inflicted slowdowns?

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