Anatomy of a recession

The Philippine economy is now officially in recession, the first time in nearly three decades. To be in recession, the economy must have contracted over two consecutive quarters. The earlier reported -0.2 percent GDP year-on-year growth (contraction) posted for the first quarter (Q1) has been revised with fuller data, and turns out to have been more than three times worse, at -0.7 percent. The second quarter (Q2) figure is a much deeper dive of -16.5 percent. Various data feeding into the national income accounts would have been much more difficult to obtain under the community quarantines, so I’d expect the Q2 figures to be even less precise than usual. We will know whether the reported -16.5 percent was an under- or overestimate only in November, when the third quarter data will come out with revised and updated Q2 figures.I was actually somewhat relieved when the number came out. My own rough calculations had pointed to a second-quarter GDP contraction exceeding 20 percent. This was based on my loose tracking of sectors and industries that appeared to be forced to a standstill, which would have meant a 100-percent decline from last year, during the lockdown months under enhanced community quarantine (ECQ). Thankfully, only a few industries posted growth rates approaching -100 percent, notably air transport (with -98.3 percent) and manufacture of leather products including footwear (-90 percent). Also hard hit were water transport (-72.8 percent) and land transport (-65.6 percent), but that’s because transport of cargo had to go on, even as passenger transport stopped completely. And since ECQ did not last for the whole quarter, many industries were able to resume production later in the quarter. Hence, industry-wide declines mostly did not get near 100 percent.

What other industries suffered deep declines? As expected, accommodation services (prominently hotels) dived by 73.4 percent, while food and beverage service industries (restaurants, food stalls, and bars) fell 64.9 percent. Tourism, both domestic and foreign, has all but stopped, and while domestic tourists may have started to venture out again with the easing of the quarantines, international tourists won’t be coming back in for a while. Hotels are thus likely to continue seeing low occupancy rates in the foreseeable future. Those that signed up to become quarantine hotels for arriving international passengers were able to mitigate the drying up of usual demand, but for the greater majority of the industry, short-term prospects look grim.

Other industries that saw declines deeper than 50 percent include sale and repair of motor vehicles and motorcycles (-78.5 percent); construction by households and nonprofit institutions serving households (-75 percent), accounting for a third of all construction activity; and arts, entertainment, and recreation (-63.2 percent).

As is now well known, the unexpected and pleasant surprise came from agriculture, which posted a 1.6 percent year-on-year improvement. This was propelled by stellar 7.2 and 15.6 percent growth rates posted by rice (palay) and corn, respectively, and an even more spectacular 76 percent growth in sugarcane (including muscovado) production. This is in spite of COVID-19, and in the case of rice, in spite of more open trade in the commodity since the rice tariffication law, suggesting that the industry is now adjusting to the more competitive market regime that doomsayers predicted would kill the industry.

Were it not for the significant declines in livestock (-8.2 percent) and poultry (-4.8 percent), together accounting for nearly a quarter of agricultural output in the first half of the year, the sector’s growth would have been even more impressive. Unfortunately, livestock had its own virus (African swine fever) to contend with, which had been around well before COVID-19 started afflicting humans. But more than reflecting improved governance in the sector—thanks to Agriculture Secretary Willy Dar—the fact that agriculture saved the economy from even worse decline reinforces the long-held view that we must really look to this sector as the economy’s ultimate backbone, COVID-19 or no COVID-19.

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