The economy shrank 0.2 percent in the first quarter, a sharp reversal from the 5.7 percent expansion a year ago, but officials warned that the second quarter would be even worse, given the continuing effects of the Luzon-wide lockdown in response to the COVID-19 pandemic.
The Philippine Statistics Authority (PSA) said the first quarter decline in gross domestic product (GDP) was the first contraction since the fourth quarter of 1998, and traced it to a decline in manufacturing, transportation and storage, and accommodation and food service activities.
READ: Diokno undeterred, sees strong GDP pickup in Q4
Agriculture, forestry, and fishing; and industry contracted by 0.4 percent and 3.0 percent, respectively. Services, on the other hand, posted a growth of 1.4 percent.
The agency cited the impact of the eruption of Taal volcano and moves to contain the COVID-19 pandemic.
On the expenditure side, items that declined were gross capital formation, 18.3 percent; exports, 3.0 percent; and imports, 9.0 percent. Household final consumption expenditure and government final consumption expenditure grew 0.2 percent and 7.1 percent, respectively.
In addition, net primary income from the rest of the world dropped by 4.4. percent resulting in the 0.6 percent contraction in the gross national income.
Bangko Sentral ng Pilipinas Governor Benjamin Diokno said the second-quarter GDP could be worse than the first, considering the enhanced community quarantine in Luzon covered almost two months of the second quarter—from middle of March to May 15, 2020.
Finance Secretary Carlos Dominguez III said the first-quarter decline was the inevitable outcome of the initial ravages on the global economy by COVID-19, which first surfaced in Wuhan, China, in December 2019 and then started “upending life as we know it” at the onset of 2020.
Dominguez said he sees further declines in the second quarter with the economy in an extended stupor, before mounting a hoped-for bounce-back in the second semester on the back of government-led plans to accelerate state spending on infrastructure and social programs and other measures to restore consumer confidence and induce a quick economic recovery.
READ: PH economy contracts in 1st quarter
But an economic recovery is contingent on finding and gaining access to an effective cure or vaccine, Dominguez said.
Acting National Economic and Development Authority director-general Karl Kendrick Chua said the country has faced significant socio-economic risks and shocks during the first quarter, all totally unexpected.
These include the Taal volcano eruption in January; a significant decline in tourism and trade starting in February due to the COVID-19 pandemic; and the need to implement the enhanced community quarantine (ECQ) in Luzon and other parts of the country starting March.
“Containing the spread of the virus and saving hundreds of thousands of lives through the imposition of the ECQ has come at great cost to the Philippine economy…. Even so, our priorities are clear–to protect lives and health of our people,” Chua said.
Chua said COVID-19 has certainly posed serious challenges to the country’s strong growth and development prospects.
“This is the first time real GDP growth fell into negative territory since 1998 during the combined El Niño and Asian financial crisis,” he said.
Chua said despite the challenges, the economy was still well positioned to recover strongly because of the country’s solid macroeconomic and fiscal management.
He said the recent legislation of crucial economic and tax reforms such as the Tax Reform for Acceleration and Inclusion or TRAIN Law, the Sin Tax Laws of 2019 and 2020, the Rice Tariffication Law, the Universal Health Care Law, and the Ease of Doing Business Law have all helped prepare for any crisis.
“We continue to enjoy low and stable inflation, particularly after the passage of the Rice Tariffication Act. In 2018 and 2019, we recorded the lowest poverty rate, unemployment rate, and underemployment rate in many decades, thanks in the large part to our Build Build Build program,” he added.
Despite the steep drop in first quarter GDP, the interagency Development Budget Coordinating Committee was sticking with its zero to the minus 0.8 growth projection for the year, he said.
ING Bank Manila senior economist Nicholas Antonio Mapa said the big drop in GDP growth in the first quarter served as a warning for a “steep drop ahead.”
“We continue to price in a probable deep contraction as early as the second quarter due [to]stringent lockdown measures and the overall impact of COVID-19,” Mapa said.
“The first-quarter GDP report moves us to downgrade our current -2.2 percent full-year forecast to -2.9 percent for the year,” Mapa said.
Last year, GDP grew 6 percent, the low end of the target range of 6 percent to 7 percent, despite the delay in the approval of the P3.7-trillion national budget.
Economic managers projected a 6.5 percent to 7.5 percent GDP expansion for this year to be driven by investments and faster spending on infrastructure projects under the Build, Build, Build program.
But the COVID-19 pandemic convinced private and public economists to believe that the target could not be met, with some of them even saying that growth could be flat or worse within a negative territory.
Growth in consumer spending, which is the Philippines’ key economic driver, slowed to just 0.2 percent during the first quarter, hit by the closure of malls and shopping centers in areas under lockdown.
Many areas in the Philippines have been under quarantine since mid-March, and will remain so until at least mid-May, to contain the spread of the virus, including Metro Manila and surrounding areas where most economic activity takes place.
“The current lockdown… will undoubtedly drag GDP deep into contraction as we see how destructive the enhanced community quarantine can be for the consumption-driven economy,” Mapa said.
READ: Asia equities turn negative as virus economic reality bites
The view was echoed by presidential spokesman Harry Roque, who said the economy will likely experience a steep decline in the second quarter.
“The economy may shrink even more during the month of April because the whole month… is basically under ECQ and the first two weeks of May as well. We definitely expect a big contraction but the economic planners are very vigilant,” he said.
But Roque said the economy will bounce back through the Build, Build, Build program of government spending on infrastructure.
“We’re using public spending as a tool for economic recovery and we’re also using money supply as a tool also for economic recovery.”
Economic growth would return in 2021, he added, with the return of tourism, trade and manufacturing after the virus crisis is over.
Senator Joel Villanueva said the economy’s contraction is expected because of the ECQ, which was the only way to arrest the spread of COVID-19.
“As we slowly restart the economy, our government must continue its social support programs until we safely transition to the new normal,” he said.
Villanueva said economic resilience varies from person to person. He said those living below the poverty line will always need a helping hand in these times.
The longer the quarantine stays in place, the more individuals will need financial and social assistance, he said.
“We must realize this and must be ready to provide assistance and review their target beneficiaries. We also see companies beginning to lay-off workers. We must act immediately to provide support to these companies so that they can continue to employ their workers,” he said.