-11.5%

The road to recovery just got a little more challenging.

This week the Philippine Statistics Authority reported that the domestic economy continued to contract by -11.5 percent in the third quarter ending September. Analysts had predicted a more benign number in the single digits.

For the first three quarters of the year (including the first quarter when our economy was still on expansion mode), GDP contracted by -10 percent. This is the worst economic performance since modern metrics were used to track economic activity.

Analysts are now predicting we will end the year with a -10.8 percent contraction. Our economic managers were hoping for a yearend number of about  -6 percent. But all indications point to continuing contraction in the fourth quarter as mitigation measures against COVID-19 remain in place.

True, our industrial sector posted +7.6 percent in the third quarter. But that does not make up for the -18 percent contraction in the second quarter.

Our services sector grew by +9.5 percent in the third quarter. That looks impressive – but not if we compare it to the -15.8 percent contraction in the second quarter. We still have much ground to make up for.

Household spending continued to contract by -9.3 percent in the third quarter. Our consumers worry about future income, preferring to hold on to their cash.

Even worse, capital formation was smaller by -41.6 percent. Businesses still lack the confidence necessary to put in more money to expand.

The only tool we have in the toolbox to restart our economy is government spending. But this seems to be the factor holding back our recovery.

Government final expenditure did grow 5.8 percent in the third quarter. But this is still lower than the 21.8 percent annual growth posted in the second quarter. There is reason to fret about the bulk of the Bayanihan II funds still trapped in the DBM.

Our strategy for recovery is anchored in the quick resumption of the infrastructure modernization program. But government construction activity in the third quarter is down -28.1 percent on a year-on-year basis.

Private construction activity turned in an even worse performance. In the third quarter, private construction is down -38.7 percent year-on-year. This is its worse performance on record.

Until the market sees government spending spilling out, everyone will be hesitant to spend or to invest. We will continue to be trapped in this severe cycle of recession.

We are attempting to swim against the tide. The entire global economy is in recession. We are basically trying to pull ourselves up by our bootstraps by means of government spending. That spending should begin flowing.

More than that, it might be useful to reopen the debate on the stimulus package. Our economic managers praised Bayanihan II for being “fiscally responsible” (translation: it is sustainable, it leaves our powder dry in case the pandemic persists and it does not call for wild borrowing that could compromise future economic performance).

But while prudent, the stimulus package does not seem enough to help our economy pick up and regain its growth momentum. We might need to spend more (and soon) for emergency employment and for bailing out troubled but critical enterprises.

Vaccine

The stock markets across the globe jumped after Pfizer announced their vaccine appeared to have 90 percent efficacy and could soon be ready for deployment. Those results need official scientific verification. But that is good news nevertheless.

But the excitement needs to be restrained.

First, the vaccine will be ready for distribution outside the US sometime towards the middle of next year. In the meantime, we need to keep all the mitigation measures in place for many more months.

Even after we start deploying the vaccine (after finding the funds to procure them), mitigation measures still have to remain in place. The Pfizer vaccine needs to be administered twice, with a three-week interval. Only a small percentage of our population will get it anytime next year. That still leaves a large number vulnerable to infection.

Second, the Pfizer vaccine requires very cold storage. It needs to be kept at -70 degrees centigrade. We have not found the technology for very cold vaccine storage. The tropical countries might find this a hindrance to rapid distribution of the product. Storage costs might even be higher than the cost of the vaccine, as well as the manpower to administer it.

We might need to wait for the other vaccine makers to come out with versions that do not require two-stage administration or very cold storage. Several other vaccine variants are in third-stage testing at this point and may be available several months after the Pfizer vaccine becomes available.

The costs of storage and administration will have to be worked out before we settle on the variant we want. There has been some controversy over the third stage testing of a Chinese vaccine in Brazil – although the latest information suggests this might be due to internal politics in that country than to the adequacy of this vaccine alternative.

The really good news comes from the Octa group that has been independently observing our response to the pandemic.

Octa reports the positivity rate in the NCR, epicenter of infections in the country, has fallen to 5 percent. The WHO recommends a positivity rate of 5 percent for at least two consecutive weeks before considering any reopening of the economy. We appear to be finally getting there.

But again, a word of caution before we all rush out to celebrate: any premature lifting of mitigation measures could invite a spike in infections. We see that happening now in Europe and the US.