Fitch Solutions Country Risk and Industry Research, a unit of Fitch Group, sharply downgraded its 2020 growth outlook for the Philippines to -9.1 percent from the previous estimate of -2 percent, following the 16.5-percent contraction in the second quarter amid the COVID-19 pandemic that sent the economy crash-landing into technical recession.
Fitch Solutions said in a report the Philippine economy was set for a “painful recession” this year as the country struggles to manage the health crisis.
“With another surge in COVID-19 cases in third quarter, the recovery in economic activity we had expected in H220 [second semester] now looks highly unlikely,” Fitch Solutions said.
It said that in a base-case scenario, the economy would gradually resume activity by year-end, although with domestic activity considerably weaker than previously assumed.
“However, by 2021, we expect the economy to recover, with a government-led infrastructure drive, taking growth to 6.2 percent for the year, revised down slightly from 6.5 percent,” it said.
“In our downside scenario, we see the government struggling to contain the virus and this having impacts for growth over the medium term, with less productive fiscal spending and higher levels of debt,” it said.
It said the contraction in second quarter was much sharper than the Bloomberg consensus estimate of 9.4 percent and reflected the Philippine economy’s reliance on domestic activity, particularly household consumption, as a driver of growth.
Fitch Solutions said it was expecting growth in the third quarter to show a slight improvement over the second quarter, given a better external backdrop and a slow lifting of lockdown measures.
“Nevertheless, the shock to household consumption in 2020 will prove significant, such that the economic recovery in 2021 will be softer. We expect higher household indebtedness, unemployment and damaged consumer confidence to result in an uneven recovery in domestic consumption,” it said.
The Philippine Statistics Authority said the 16.5-percent contraction in the second quarter was the lowest in nearly four decades, or since 1981.
The disappointing figure brought the average GDP growth in the first semester to -9 percent, slower than the government’s previous projection of 2-percent to 3.4-percent contraction for the entire year.
The Philippines posted the deepest contraction among Southeast Asian economies in the second quarter. In the same period, Indonesia contracted by 1.2 percent; Thailand, -6.5 percent; and Malaysia,
-3.9 percent. Vietnam grew by 2.1 percent.
The inter-agency Development Budget CoordinatingCommittee—composed of the Department of Finance, Department of Budget and Management and the National Economic and Development
Authority—is now looking at a full-year contraction of -5.5 percent.
PSA data showed that the main contributors to the decline were manufacturing, -21.3 percent; construction, -33.5 percent; and transportation and storage, -59.2 percent.
Among the major economic sectors, only agriculture, forestry and fishing grew 1.6 percent. Industry and services decreased dby 22.9 percent and 15.8 percent, respectively.
Economic Planning Secretary Karl Chua said while the decline in the second quarter was huge, signs of recovery were beginning to be seen. He said manufacturing production, exports and imports have
taken a U-turn as the pace of decline slowed.
“The volume of production index was -39 percent in April but improved to -19 percent by June. The second quarter contraction averaged -29 percent, and we expect it to gradually recover in the coming months,” he said.
“Similarly, exports and imports are beginning to recover. Exports improved from -50 percent in April 2020 to -13 percent in June 2020 and averaged -30 percent in the second quarter. Exports to China, one
of our largest trading partners, improved from -55 percent in April to a 2.8 percent expansion in June. As China’s economy improves in the second semester, we can expect export growth to follow,” Chua said.
Imports, which support both household consumption and business investment, also recovered gradually from a large contraction of -65 percent in April to a slower contraction of -25 percent in June, or an average decline of -44 percent in the second quarter.