Economy falters: GDP at 6%

Slowdown due to policy decisions—Pernia

Economic growth slowed sharply in the second quarter and fell well short of expectations as a result of policy decisions that included the shutdown of Boracay island, officials said Thursday.

The 6-percent expansion in April-June was the weakest in three years and ended a run of 10 consecutive quarters in which the economy grew at least 6.5 percent. Forecasts in a Bloomberg News survey put growth at 6.6 percent.

“The slowdown is partly due to policy decisions undertaken that are expected to promote sustainable and resilient development,” Economic Planning Secretary Ernesto Pernia said.

“We are referring to the temporary closure of Boracay,” he added.

The holiday island was shuttered in April for a six-month cleanup on the orders of President Rodrigo Duterte, who branded the resort a “cesspool” sullied by tourism-related businesses flushing sewage into the sea.

Despite the lower-than-expected figures, the Philippines remains one of the best-performing economies in Asia behind Vietnam’s 6.8 percent and China’s 6.7 percent for the quarter.

The results come as concern is growing in the Philippines over inflation, which hit a five-year-high 5.7 percent in July.

The central bank raised key interest rates by 50 points at its meeting late Thursday.

In addition to the slower second-quarter numbers, Pernia said gross domestic product for the first three months of 2018 was also adjusted downward to 6.6 percent, from 6.8 percent.

He said this meant the economy only grew 6.3 percent in the first half, well below the 7-8 percent full-year target.

Pernia said the closure of Boracay, which the government says draws two million tourists each year and pumps roughly $1 billion into the economy, “partly made a dent on the economy with growth in exports of service slowing.”

Agriculture’s anemic 0.2 percent growth did not help, while mining also slowed due to the closure of several pits and higher mineral taxes.

Industrial growth also eased because of strict regulations of controlled chemicals and higher shipping rates.

“We are also gravely concerned about the almost stagnant output of the agriculture sector,” Pernia said, noting a “gross deficiency in the domestic production of food” had helped fuel inflation.

The government is preparing a raft of “temporary” measures to improve food supplies, he said, including cuts to import duties of certain products and possible lifting of government quotas on imports of rice, the country’s staple cereal.

The ceiling was meant to protect Filipino rice farmers from competition with imported grains, but Pernia wants it replaced with temporary tariffs.

The Philippine Statistics Authority reported on Thursday that manufacturing, trade, and construction sectors were the main drivers of growth for the period. Among the major economic sectors, services recorded the fastest growth at 6.6 percent. Industry followed with a growth of 6.3 percent.

Pernia said the economy would have to expand by at least 7.7 percent in the second semester to attain the low-end of the 7 to 8 percent target range for 2018.

“Although this growth still puts the Philippines as one of the best-performing economies in Asia, just after Vietnam at 6.8 percent growth and China at 6.7 percent growth, and ahead of Indonesia’s 5.3 percent, this growth rate is less than what we had hoped for,” Pernia said in a briefing.

He also said that the second-quarter growth could have been faster were it not for higher inflation. Inflation in the first half averaged 4.3 percent, over the target range of 2 to 4 percent for the year.

ING Bank Manila senior economist Joey Cuyegkeng said two sources of downside surprise were the deteriorating trade imbalance and the poor performance of the agriculture sector.

PSA data early this week showed that the trade deficit in the first half hit $19.10 billion, higher than the $11.75 billion a year ago and $15.75 billion a month ago. For the month of June alone, the deficit widened to $3.35 billion from $1.59 billion a year ago, as imports continued to significantly outpace exports.

The London-based economic research consultancy firm Capital Economics expects the slowdown in GDP growth to continue over the second half of the year as tighter monetary policy and higher inflation weigh on consumer spending.

“The upshot is that, although the economy is set to perform relatively well over the next year or so, growth should continue to ease from around 6.5 percent this year to 6 percent in 2019. In contrast, the consensus is expecting growth of 6.6 percent next year,” it said.

Rajiv Biswas, Asia-Pacific chief economist of the London-based global information provider IHS Markit, said the government and central bank face a more challenging economic outlook of softening growth momentum and rising inflation.

“With the BSP having commenced a monetary policy tightening cycle, the impact of higher policy rates will also be a moderate drag on GDP growth over [the] coming quarters,” Biswas said.

Biswas said a key risk to the near-term outlook was from further rises in world oil prices, which could push inflation higher and force more BSP rate hikes during the second half of 2018 and in 2019.

“Another downside risk to the near-term economic outlook is from the escalating US-China trade war, which could hit the East Asian manufacturing supply chain to China and have some negative impact on Philippines manufacturing exports,” Biswas said.

Pernia said there was a “grave concern” about the almost stagnant output of the agriculture sector, saying this supported the premise that the main reason behind the high inflation was the gross deficiency in the domestic production of food, which was not augmented by imported goods, especially rice.

“Today’s data on agriculture output strengthens the case for the government, particularly the Department of Agriculture, to urgently conduct a comprehensive review and reform of policies and programs that restrict access to land and the use of land, access to technology and extension services, access to finance, and access to markets,” Pernia said.

“This should also include an assessment of the market environment, including the possible presence of cartels and incidence of smuggling. The Department of Trade and Industry and the Philippine Competition Commission can help us in this endeavor,” Pernia said.

Pernia said rice tariffication was a crucial measure to address food supply issues and their consequent impact on inflation. He said it would reduce the policy uncertainty in the rice trade, and encourage more productive investments in the sector.

“While headline inflation has risen in the past six months, the month-on-month numbers showed a downward trajectory so that inflation should moderate by the end of the year in line with the forecast of the Bangko Sentral ng Pilipinas,” he said.

Pernia, however, mentioned some “silver linings.” He said in the case of household consumption, higher disposable incomes resulting from the recently passed Tax Reform Package 1 and improved labor market conditions were expected to help sustain growth.

Government consumption recorded a slight deceleration at 11.9 percent from the 13.6 percent in the previous quarter. He said this was still higher than the 7.6 percent recorded in the second quarter of 2017. The dip was the result of lower disbursements for personnel services, maintenance, and operating expenses, as well as subsidies despite the higher allocation to the local government units.

Still, he said the timely implementation of the “Build, Build, Build” program bodes well with the construction industry.

The Palace, meanwhile, said it was all right if GDP falls further as a result of measures that protect the environment.

“We’re investing in the future and not just in the present,” said Presidential Spokesman Harry Roque in a Palace briefing Thursday.

Roque was responding to Pernia’s observations about the impact of the Boracay closure and a mining crackdown on GDP growth.

“The President stressed the need to protect the environment and to ensure that the next generations will also enjoy Boracay as we know it—an island paradise,” said Roque.

He also brushed aside concerns at a slowdown.

“I don’t think it is alarming because 6 percent is still high. We may not have met the target, but 6 percent is very high,” he said. With AFP and Nat Mariano

Topics: economic growth , Boracay island , Secretary Ernesto Pernia , President Rodrigo Duterte
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