Growth from within
IS GLOBALIZATION over? Economies around the world now see the need to shift away from reliance on exports of their goods and services, and toward stronger reliance on growth in their domestic markets. With international trade slowing worldwide, the export-oriented Asian “dragons” and “tigers” of the past two decades now see merit in “rebalancing” their economies toward more domestic-driven growth. Export growth has ceased to become the engine of economic growth that it was in the heyday of globalization from the 1980s to the early 2000s. Our export-driven neighbors, Singapore, Malaysia and Thailand, for whom exports equal 190, 75 and 70 percent of gross domestic product (GDP), are among the worst hit by the ongoing export slowdown. China, erstwhile “factory of the world” whose GDP growth rate had exceeded 10 percent for most of the past decade, is now seeing it settle at a slower 6-7 percent—which has allowed us to take the lead as the fastest-growing economy in East Asia.
Meanwhile, the Philippines, whose exports have always been a much smaller part of GDP (28 percent lately), is seeing growth accelerate and defy the general slowdown being felt most everywhere else. As Japan, China, Korea, Singapore, Malaysia and Thailand—and most other higher-income economies worldwide—now preach “rebalancing” as defined above, we have long been in the situation that our neighbors now want to rebalance to. It wasn’t always good for us, to be sure, as our traditional failure to get on the export bandwagon pushed us behind and made us the “sick man of Asia” that perennially lagged behind our comparable neighbors, in both growth and poverty reduction.
But now that accelerating internal demand from household consumers, government and firms are propelling our economy’s growth, we have attained a newfound status as growth leader in the region, even beyond. And because of our unique demographics projected over the next two-three decades (that is, a population profile to be dominated by working-age adults), we are poised to maintain such leadership well into the future.
What’s the outlook for household consumer spending? The past two decades have seen it propped up by ample flows of remittances from overseas Filipino workers, whose growth has been tapering lately. Can consumer spending sustain its growth, then? Authorities attribute the slowing remittance growth to slower deployment of workers abroad. But there appears to be a positive reason for this. Domestic employment data suggest that there may be less need for our workers to seek their fortunes elsewhere. The July unemployment rate of 5.4 percent is the lowest I’ve seen since the 1980s, after the jobless rate finally broke below the 6-percent barrier last year. Meanwhile, the underemployment rate is at 17 percent, also on a declining trend after consistently hovering at 20-21 percent. I’d worry about slowing remittance growth if domestic unemployment and underemployment had remained high. The fact that this isn’t so tells me that more workers are finding gainful employment without having to leave home. Incomes earned abroad are being replaced by domestically earned incomes in fueling consumption growth. For our workers and their families, that is a positive development.
What about government spending? The outlook on this similarly appears rather bullish, with government now targeting infrastructure spending at 5 percent, and eventually to 7 percent of GDP, after having only done 2-3 percent in past years. Much more of that infrastructure spending will be in the countryside, especially Mindanao, thereby better dispersing the economy’s growth geographically. Recent announcements indicate that the public-private partnership projects in infrastructure are finally getting rolled out, even as government-funded projects are also being accelerated. All these bode well for more internally driven growth via government spending.
As for investment spending, we’ve seen a dramatic break from the past over the last six years in the growth of gross capital formation (aka aggregate investments, including public and private, and foreign and domestic). In the period 2004-2009, average annual investment growth was a measly 1.8 percent, but zoomed to an average annual growth of 10.8 percent in the last six years. And things have gotten even better this year. In the first half of 2016, gross capital formation grew by a whopping 27.1 percent from the same period last year, with investment in durable equipment zooming at 41.1 percent.
This investment growth is remarkable, given the “wait and see” stance that investors would normally take in an election year, typically leading them to withhold investment until the business policy outlook becomes clearer. The fact that investment spending zoomed nonetheless suggests that investors see more fundamental reasons to put their stakes in the country’s economic future. The ongoing manufacturing surge must be a major factor here, induced in large part by China’s escalating labor costs that have affected its attractiveness as a manufacturing base, along with opportunities arising from closer economic integration in Asean.
Will this investment momentum be sustained? I’ve had conversations with a lot of business people lately, including in Mindanao last week, and I’m hearing too many stories about actual investment intentions now being put on hold because of emerging uncertainties in the new administration’s policy directions, especially on labor and wages. It may be time for another serious government-business dialogue, if we are to avoid dissipating the momentum we have achieved.
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