Dealing with the bad news

I thought of writing yet another article on the good news hiding behind the aggregate numbers of the second quarter economic slowdown, as there’s indeed much more to cite, enough to fill one more article. But lest I begin to be labeled a “prophet of boom,” I instead decided to take a closer and critical look at the downsides of our recent economic performance. While the second quarter slowdown traces to both internal and external causes, there are measures we can take to rectify or improve the situation on both.

The obvious question to ask is, where exactly did the slowdown come from? This can be traced from both the production/supply side and the expenditure/demand side. Gross domestic product (GDP) is routinely measured using both approaches, and the National Statistical Coordination Board provides tables detailing both.

Of the three major production sectors in the economy, it was the industry sector—made up of manufacturing, mining and quarrying, construction and utilities—that pulled total growth down, because it slowed down from the first quarter. As we observed last week, agriculture and services, the sectors where the bulk of jobs in the economy are, actually grew faster than before. The industry slowdown was mainly due to construction, which fell 16.1 percent overall because government construction spending plummeted by 51.2 percent, that is, reduced to less than half. But the private component of it continued to grow briskly at 19 percent, showing that private investment appetite remained on a healthy growth mode.

The other drag on industry was utilities (electricity, gas and water), which also suffered negative growth (-2 percent). This was partly due to higher energy costs, but also probably reflects normalization from the abnormally high election campaign-related demand last year. Manufacturing and mining/quarrying continued to grow, although at much slower rates than last year. In the case of mining and quarrying, it was the 10.7 decline in the latter that slowed things down—and again, the drop in government construction was clearly the culprit.

I have argued that the quality of the much lower government construction spending is probably far superior to the much higher spending last year by the previous administration. Still, a reduction to less than half is way too much. I don’t believe that the effort to eliminate “tongpats” or “bukol” from public works projects was the whole story here. Part of it must have been continuing inefficiencies in the system, and part of it must have been the learning curve of new public works officials. In seeming admission of this, the government has indicated its resolve to speed up capital spending in the second semester—suggesting that they could have done so earlier. In any case, this is an imperative that has no ifs and buts about it; the government simply has to get its act together and get those programmed infrastructure projects in place. We have lagged behind our Asean neighbors on this for far too long that we simply must catch up as quickly as we can.

On the spending or demand side, we account for spending by private consumers, government (for both consumption and public investments), private firms (for investments), and foreigners (who buy our exported goods and services). Here again, the slowdown traces to the same 51.2 percent drop in government spending for public investments in infrastructure, i.e., the public component of construction mentioned earlier on the output side. Investments in durable equipment also slowed down markedly from 18.7 percent growth in the first quarter to only 2.2 percent in the second. The detailed breakdown shows steep drops in transport equipment, air-conditioning and refrigeration equipment, textile machineries, sugar mill machineries and sawmill and logging equipment (even as purchases of farm machineries, telecommunications equipment, and computers and office equipment actually sped up). Transport equipment was reportedly impaired by reduced shipments of vehicle components from calamity-stricken Japan, and not by lack of demand; as a result, there are now long waiting times for vehicle orders. Other equipment may have been subject to the same supply-side restriction, rather than reduced investment demand.

The other bad news on the spending side was on exports, which fell slightly (by 0.3 percent). This was a clear offshoot of the economic slowdown in our major trading partners, especially Japan, our biggest export buyer. Sluggishness in the US and European economies has likewise reduced their imports from us. This part of the slowdown is beyond our control, and our best recourse is to adapt to the new environment where the old rich economies can no longer be relied upon too heavily as markets for our products. Those with even heavier dependence on these export markets have thus suffered more severe slowdowns, such as Thailand and Singapore, both of which did more poorly than we did.

In sum, then, the disappointing second quarter slowdown ultimately traces to two things: the drop in government construction (which was of our own doing), and slow export markets in Japan, United States and Europe (which was beyond our control). There are remedial measures we can take for both. The first requires that government shape up and speed up on infrastructure projects. The second requires that we look more strategically to our own internal markets and fast-growing neighboring markets such as China and Asean, while shedding our over-reliance on traditional trading partners. This process will take more time, so the time to act is now.

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