Recent economic slippages

IS OUR economy losing steam? Latest economic data haven’t been quite as encouraging as what we had been seeing since 2010. That year saw a clear break from the past, most importantly in levels of private investment. In that year, the data showed total fixed investments surging by more than 19 percent, reversing a negative growth of -3.5 percent in 2009. It was the investments of private Filipino investors that began reigniting this growth in 2010. Foreign investors were not as quick to catch on, but by last year, foreign direct investments (FDI) had posted a record $6.2 billion, nearly double that of the previous year, and more than six times the annual average in the past decade.

President Aquino can take justifiable pride in how his leadership ushered in a “breakout” for the Philippine economy, as analyst Ruchir Sharma put it in his 2012 international bestseller “Breakout Nations.” Statistics bear this out. Based on my usual “PiTiK test”—with P-T-K standing for presyo (prices), trabaho (jobs) and kita (incomes)—the economy has indeed been breaking out from past performance patterns. Prices are more stable, with the annual inflation rate averaging 3.8 percent in 2010-2014, vs. 5.8 percent in 2004-2009—and was down to only 1.2 percent last month. Employment generation rose from an average of 766,000 net new jobs per year in 2004-2009, to 776,000 in 2010-2014; in 2014, more than a million net new jobs were actually created. This is good news considering that around a million new working-age Filipinos come about yearly. As for incomes, gross domestic product (GDP), which measures both incomes and output, grew by an average of 6.4 percent per year in the past five years vs. only 4.9 percent in 2004-2009. What’s remarkable is that manufacturing, whose growth in 2004-2009 averaged only 3.0 percent annually, has averaged 8.2 percent growth per year since 2010, faster than the entire economy’s growth. This is significant as growth in manufacturing translates into more and better quality jobs than growth in services and agriculture.

But latest data have not been as upbeat. Two of the three indicators in my PiTiK test appear to be slipping lately. Price stability is still improving, as indicated above. But after last year’s full-year growth rate of 6.1 percent (still the fastest in Southeast Asia), GDP growth in the first quarter of 2015 came in at a disappointing 5.2 percent. And after four consecutive quarters showing year-on-year net new job creation exceeding 1 million, the April 2015 jobs survey showed a gain of only less than half a million from the same period last year.

Still, the unemployment rate actually fell to 6.4 percent from last year’s 7.0 percent, explained by a lower labor force participation rate. This means that a lower percentage of the working age population actually sought work in the past year, as more opted not to seek work. Hence, notwithstanding the addition of around a million new working-age Filipinos, the labor force actually expanded by only around 283,000 workers. If lower labor force participation rate is a reflection that households see less need for a second working member due to ample income, then there could be good news in this. Still, I’d prefer to see more sustained job growth so that the unemployment rate could go down even faster to levels more comparable with those in our neighbors.

More disturbing has been the latest trend in FDI inflows. Even with our FDI inflows hitting a historical record last year, it was hardly anything to crow about given that our neighbors, including Vietnam, continued to attract far more. But the real bad news is that our FDI inflows in the first four months of this year plummeted by nearly half to only $1.2 billion, from last year’s $2.38 billion. This could partly explain the halving of new job creation indicated above. It’s not a particularly good time to be missing out once again on foreign investments flowing into our region, with foreign companies either exiting from China due to rising labor costs there, or seeking a second base of operations besides China. Vietnam has reportedly attracted much more of such new investment flows than we could, even as much more is also flowing to Indonesia, Thailand, Malaysia and Singapore, our traditional rivals for FDI inflows into Asean.

Is our “breakout” fizzling out? Can we still arrest this seeming slowdown that is also translating into slackening job creation? I don’t know. What’s clear to me is that we should be moving even more aggressively at this time, rather than allow the election fever to make us drop our guard on needed reforms. I worry about the common expectation that little would come out of the 16th Congress in its final session with the onset of election fever, when there remains so much critical homework to be done. The National Economic and Development Authority recently communicated to the Senate a list of important reforms that remain in Congress’ “to do” list. These include measures to further liberalize investments, adopt modern trade facilitation standards, rationalize fiscal incentives, reform the tax system, take the Bangsamoro region into the political and economic mainstream, and many more.

To give up on these reforms now and pass them on to the next Congress would mean getting back to a “muddling through” mode for at least another two years. At this time when the world and regional economies are undergoing rapid change, I fear this would border on economic suicide. And to be sure, its casualties will not be the better endowed among us.

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