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Saturday, May 31, 2014

First-quarter GDP beats most estimates, but in the wrong direction

Ben D. Kritz
Ben D. Kritz
Just days after a cringe-inducing exercise in self-aggrandizement at the World Economic Forum meeting by President B.S. Aquino 3rd and His Merry Men, the country’s first-quarter GDP growth figures beat every forecast, coming in at a disappointing 5.7 percent.
Prior to Thursday’s announcement by the National Statistical Coordination Board (NSCB) a parade of Administration officials had reassured various media outlets the figure would be in the upper half of the government’s 6.5-percent to 7.5-percent target, while outside analysts’ estimates ranged from a low of about 6 percent by Barclay’s Bank and HSBC to a high of 6.7 percent by Moody’s Analytics; local banking giant Metrobank pegged the expected growth at 6.1 percent, while a poll of readers conducted by BusinessWorld resulted in an optimistic 6.55-percent estimate.
Before Sonny Coloma or Cesar Purisima steps forward to say something bizarre about the unexpectedly low Q1 result (which is probably too late at this point, since my columns are typically written a day or two before they appear), let me explain what the official Administration comment should be: While lower than anticipated, a 5.7-percent growth rate is still respectably strong, and the Philippines continues to outperform most of the region in this respect, having only been topped by China’s 7.4 percent first-quarter growth and a 6.2-percent expansion in Malaysia.
The Philippines’ first-quarter figures are also based on a fairly high benchmark, the 7.7-percent growth in Q1 2013; this was actually something HSBC considered in making its 6-percent forecast, which at the time (about two weeks ago) drew some snippy reactions from government economic planners for being pessimistically low. Therefore, “less than we hoped, but still very good” is probably the safest and most reasonably honest response the government could make.
Of course, as we have continually pointed out, just because GDP growth is the common denominator in comparing the performance of national economies, it is not necessarily the most comprehensive or realistic indicator of the true state of the economy. The paradox of strong GDP growth and downbeat real-world circumstances of persistently high unemployment, poverty, and income inequality rates has been discussed ad infinitum, and that conversation will continue until the two sets of indicators get at least a little closer to actually reflecting each other.
But even within its own, somewhat, narrow context, there are some worrying signs in the otherwise-adequate Q1 outcome:
• Government spending was stagnant: While much of the lower-than-expected output was attributed to the lingering impact of last year’s Typhoon Yolanda, the lack of effort to overcome those effects is reflected in the paltry 2-percent increase in government spending year-on-year, which, given the country’s continuing population increase of just under 2-percent annually, means that government spending was essentially flat. Two entire quarters—the fourth quarter of 2013 and the first quarter of 2014—have passed since Yolanda carved a path of destruction across the nation’s midsection, yet government economic activity appears to be geared toward carrying on as though nothing had happened.
• Fixed capital formation in construction retracted, again: Construction had double-digit growth for five straight quarters between Q2 2012 and Q2 2013 before tailing off to a more modest 3.9-percent growth in the third quarter of last year. Since then, however, construction has declined for two straight quarters, although Q1’s 0.9-percent drop was an improvement over the more than 4 percent decline in the fourth quarter of last year. Again, it should be noted (with stern disapproval) that these were the post-Yolanda quarters, in which a large section of the country presented a ready-made opportunity for a huge boost in construction numbers.
• Industry growth has been cut in half: Growth in the industrial sector in Q1 was actually a 6.8-percent decline from Q4 2013, but that is not actually outside the normal up-and-down, quarter-to-quarter pattern; it is, however, a somewhat larger gap than in the past couple of years. The difference was only 4.9 percent between the first quarter of 2013 and the last quarter of 2012, and 6.3 percent between Q1 2012 and Q4 2011. What is, perhaps, a reason for more concern is the 5.5 percent year-on-year growth in Q1 2014, which is less than half the 11.34-percent expansion recorded the previous year. To be fair to the NSCB, they did actually acknowledge this in so many words, but doing so after characterizing the overall 5.7-percent GDP growth as being “driven by” industry growth tends to be misleading about the implications of rapidly-slowing industrial expansion.
• Exports and imports are virtually equal components of the economy: Exports make up 38 percent of the economy, while imports have a 38.5-percent expenditure share. For a well-developed and diversified economy that would not be a bad situation, as it would represent only a relatively minor trade deficit that could easily be absorbed by other parts of the economy. For a developing economy like the Philippines, however, it is a sign that consumption is outrunning production, which is, in turn, a sign that the economy is not growing in a sustainable fashion. Government planners could argue that is also part of a typical up-and-down pattern to the economy, and in a certain sense they would be correct, but in another sense, the “up-and-down” pattern is exactly the problem. For all the spin about “inclusive growth” and “lasting gains,” the Aquino Administration has failed to produce anything even remotely resembling an identifiable positive trend, and seems fated to leave the economy in pretty much exactly the same way it found it: having some positive potential, but saddled with terminal issues the country or its leadership has yet to find the imagination to solve.

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