Economic growth slows to 5.5% in Q2

MANILA, Philippines — Economic growth shifted to an even lower gear in the second quarter, falling way short of forecasts, due to the spillover effects of the budget delay and the election ban on infrastructure projects, the national data agency said yesterday.

The Philippine Statistics Authority said the domestic economy, as measured by gross domestic product (GDP), grew at a slower pace of 5.5 percent in the second quarter, as against the 5.6 percent growth in the first quarter and the 6.2 percent expansion in the second quarter of 2018.

The second quarter growth figure was the lowest in over four years, or since the 5.1 percent pace in the first quarter of 2015.

This also brings the average growth rate in the first half of the year to 5.5 percent.  As such, the National Economic and Development Authority (NEDA) said the economy has to grow by an average of 6.4 percent in the second half to reach the low end of the government’s full-year target range of six percent to seven percent in 2019.

“The weak economic performance during the second quarter of 2019 is the continuing effect of that delay in the passage of the 2019 budget, coupled with the election ban,” said Socioeconomic Planning Secretary and NEDA chief Ernesto Pernia in a briefing yesterday.

The 2019 national budget was passed into law only in mid-April after lawmakers locked horns over supposed last-minute insertions. Meanwhile, the Commission on Elections (Comelec) was late in responding to the request put forward by the economic team to exempt select projects of national significance from the spending ban during the election season.

“For this reason, we are calling for the timely passage of the national budget for fiscal year 2020, so as not to derail next year’s economic growth,” said Pernia, noting this is important to sustain spending for key government projects and programs.

“We have also anticipated the ban on public works and other spending, leading up to the May 2019 elections.  For this reason, government agencies

had undertaken pre-procurement processes, short of award, during the latter part of 2018.  What we did not foresee though, back then, was the delay in the passage of the 2019 national budget,” he added.

This was reflected in the slowdown of government consumption spending to 5.6 percent in the second quarter from 6.1 percent in the first quarter and six percent in the second quarter of 2018. Public construction declined by 27.2 percent for the second consecutive quarter.

Government consumption contributed 0.9 percentage point to the growth rate.

Despite remaining robust with a 3.7 percentage point contribution to the growth rate, growth in household consumption also slowed to 5.6 percent in the second quarter from 6.1 percent in the first quarter and six percent in the second quarter of last year.

Pernia said the impact of El Nino on water supply, particularly in Metro Manila, adversely affected consumer confidence.

“The water crisis appears to have resulted from poor coordination between the government (with more than 30 agencies in charge) and the private distributors,” he said.

“Once again, we call for the creation of an apex water body to handle management and generation of water resources, and another one to regulate water use.  We envision a setup similar to the energy sector, where there is a Department of Energy and an Energy Regulatory Commission,” he added.

On the supply side of the economy, growth was seen in the services sector,  at 7.1 percent in the second quarter from 6.7 percent during the second quarter of 2018.  Pernia noted, however, that the sector is now under threat by the growing protectionist stance in advanced economies as well as the rise of artificial intelligence.

“We need to encourage the sector to re-tool and reform in order to service the higher value-added business processes,” he said.

The industry sector experienced slower growth of 3.7 percent in the second quarter from 6.5 percent in the same period last year.

Growth in the agriculture sector remained paltry at 0.6 percent in the second quarter from 0.3 percent in the same quarter last year. This was attributed to the contraction in the output of water-sensitive crops due to the El Nino weather phenomenon.

Because of the slower-than-expected growth in the second quarter, Pernia said there may be a need to review the government’s assumptions

“We may have to tweak or to modify some of the assumptions that we agreed on just to be realistic about what we expect this year. I think there is room for really redoubling efforts to spend on public infrastructure as you know the multiplier effect of government spending especially on infra is pretty high,” he said.

With the change in leadership in the Department of Agriculture, Pernia said the farm sector may also be on its way to contributing more to economic output.

The tourism sector, he said can contribute more by attracting high spending tourists like those from Japan, Korea and Europe.

Moving forward, Pernia said that for the remainder of the year, the government must fast track the implementation of infrastructure projects under the program as only 11 out of the 75 infrastructure flagship projects are currently in the construction phase.

“To ensure sustained construction activity, expediting the approval of permits and requirements for construction-related projects is important for agencies to attain target disbursements. This early, we need to consider extending the validity of the 2019 budget,” said Pernia.

He also urged Congress to immediately pass the second package of the tax reform program as well as the amendments to the Foreign Investment Act, the Public Service Act, and the Retail Trade Liberalization Act to remove policy uncertainties on businesses.

In addition, a revised Security of Tenure bill should be passed to address loopholes in the country’s labor law, while making sure the labor market becomes more flexible. This would help attract investments, creating more job opportunities in the process.

On the external front, he noted that exporters should diversify their products and markets to withstand external shocks and realize growth over the medium term.

He noted that for now, trade wars between advanced economies such as US and China as well as Japan and Korea have so far no significant effects to the country.