Pulls and pushes

It was welcome news last week that the economy’s growth in the third quarter managed to exceed 6 percent again, after slowing down to 5.6 and 5.5 percent in the first two quarters, respectively. Based on available data so far, this makes us the second fastest-growing economy in the region, behind only Vietnam, with its 7.3-percent GDP growth boosted by opportunistic gains from the US-China trade war. Our growth, on the other hand, is homegrown, driven more by internal domestic demand largely unfazed by a world economic slowdown induced by the same trade war that has exceptionally benefited Vietnam. Not even static exports and falling foreign direct investment inflows could offset surging domestic demand by Filipino consumers and the government, whose combined spending continued to make our economy among the top growers worldwide.

The single biggest swing-around factor that renewed our economy’s erstwhile seemingly dissipating steam was government construction activity. As is now well known, delayed passage of the government’s 2019 budget impeded the push that was to come from the “Build, build, build” thrust, particularly in the first quarter of the year. But an even deeper decline in public construction in the second quarter, when the 2019 budget had already been in place, showed that the delayed budget was not the whole story. It implied that government’s capacity to implement its planned infrastructure projects could be the bigger problem.

The Commission on Audit reported budget disbursement rates for the Department of Public Works and Highways of only 34.1 and 39.7 percent in 2017 and 2018 respectively. The Department of Transportation’s numbers were worse, and even declined from 25.6 percent in 2017 to 23.8 percent in 2018. With all eyes on these main infrastructure agencies of government, it seems they have been pushed to get their acts together. We should see improved budget disbursement rates from these agencies when this year’s numbers get reported next year. We could surmise this from the reversal of the first two quarters’ consecutive deep declines (-8.6 and -27.2 percent) in public construction into double-digit growth (11 percent) in the third quarter.

At the same time, private construction growth nearly doubled last year’s 10.4-percent growth with an impressive 19.1-percent growth this year. As overall construction comprises nearly 12 percent of total GDP, the combined double-digit push clearly helped push GDP growth back to regain its momentum interrupted earlier this year. Lower inflation also helped boost Q3 growth in household consumption to 5.9-percent annual growth, from last year’s corresponding figure of 5.3 percent.

From the production side, it was agriculture and services that drove the uptick in GDP growth, while industry growth slowed down. Corn production, which zoomed by 24.1 percent in the third quarter, was the biggest contributor to growth in agriculture, followed by poultry (with the former providing the feed inputs for the latter). Livestock was also a key contributor, but the recent influx of African swine fever is likely to dampen this in future quarters. In services, trade and repair of motor vehicles gave the strongest boost, consistent with the speedup in household consumption. But as always, financial intermediation (banks and insurance) showed the fastest growth (9.8 percent) among the main services subsectors. As I have previously observed, this is an industry that rides high whether the economy is up or down.

The US-China trade war and the global trade slowdown it has caused weighed down on manufacturing, whose meager 2.4-percent growth was largely due to the 4.3 and 11.3-percent declines in electronics and furniture and fixtures, respectively. Together, these two export products make up 22 percent of total manufacturing output, and their decline was enough to drag down the sector’s growth. The good news is that manufacturing industries representing 60 percent of the sector’s output continued to grow faster than the overall economy did. This tells me that if the trade war could end soon, we could be back on track toward the 7 to 8-percent growth we have been targeting.

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