"What can we expect to see this year?"
2019 has come into being after a year that saw GDP (gross domestic product) grow at an above-six percent pace but slow down as the year progressed. The average growth of 2018’s four quarters will probably be in the vicinity of 6.3 percent.
The performance of this country’s economy in 2018 will very likely be determined by the same factor that largely shaped last year’s economic outcome: Philippine external trade, the first TRAIN (Tax Reform for Acceleration and Inclusion) package and strong consumer demand. To this trio will be added, this year, two major factors, namely, TRAIN 2 and the spending associated with the May 13 mid-term election.
One word characterized the Philippine economy better than any other in 2018, and that word was “inflation.” The Duterte administration’s economic managers totally miscalculated —or, heaven forbid, deliberately understated—the impact of TRAIN 1’s excess taxes on the inflation rate as measured by the CPI (consumer price index) not many weeks after January 1, the start of implementation. The excise taxes began to sweep across the economic landscape, raising producer costs and consumer prices. By far the worst offenders were the excise taxes on petroleum products, which translated into higher costs for the manufacturing, energy and transportation sectors. The inflation rate steadily rose during the year, reaching 6.7 percent in October, its highest level since the world economy was made worse by the turmoil in the rice trade. Prices rose way above the P22-per-kilo price of NFA (National Food Authority) rice. Trying to help deal with an essentially fiscal issue, the nation’s monetary authority raised its basic lending rate three times, to its highest level in 11 years.
Given the weakness that has long characterized Philippine merchandise trade, the massive import buildup associated with the Duterte administration’s Build, Build, Build program was found to begin to take its toll on the BOP (balance of payments) so it did, and at yearend the merchandise account of the BOP was headed towards $40 billion, the highest level in this country’s history. Needless to say, the peso steadily lost strength, staying above 54 to the US dollar throughout the year. The resulting rise in the cost of imports exacerbated the worrisome state of the BOP.
Data released by PSA (Philippine Statistics Authority) indicate that as 2018 progressed the TRAIN-induced rise in prices caused consumers to spend less, but overall consumer demand remained strong. The principal source of the consumer’s purchasing power —OFW (overseas Filipino workers) remittances—likewise remained strong. Barring a catastrophe or a severe disturbance in the Middle East, the remittances of the millions of Filipino workers in that part of the world will in the foreseeable future remain the main source of consumption funds for their families back home.
Having seen the adverse impact of TRAIN 1’s excise taxes on consumer’s incomes, and therefore on their purchases, many legislators and businesses have been warning the DOF (Department of Finance) against proceeding with the implementation of TRAIN 2 when it is enacted into law. They have singled out for TRAIN 2’s additional fuel excise taxes, which they believe was the principal cause of last year’s inflation. Emboldened by the decline in world oil prices towards yearend, DOF’s leadership has indicated that the agency intends to stick by its timetable. That is likely to cause new inflation to rear its ugly head again, with due consequences for the consumer spending that has been providing strong support for the economy of this country.
On the positive side of the Philippine economy’s 2019 prospects is the mid-term election in May. Elections are always occasions for huge increases in aggregate spending; the coming election surely will not be an exception. It has been estimated that elections generate increments to GDP (gross domestic product) ranging from 0.5 percent to 1 percent. Since the coming electoral exercise will not be a presidential election, the increment to the 2019 GDP will likely be chosen to the lower end of the range.
Looking back, 2018 began on a strong note but lost some steam as the year progressed, thanks largely to the instability caused by the inflationary surge. When they are all in, the data will probably show that this country’s GDP grew by around 6.4 percent over the 2017 figure.
How will the economy fare in 2019? Growth in excess of 6 percent appears to have become the new normal, and thus far I don’t see anything on the horizon that is likely to break that trend. The question is, how far above 6 percent will 2019 GDP growth go? Notwithstanding the fact that GDP has never approximated the upper end of that range, BSP (Bangko Sentral ng Pilipinas) doggedly sticks to its 7 to 8 percent target range for GDP growth.
Barring any hugely negative or hugely positive development such as a humongous rise in the world oil price, I cannot see, in 2019, a departure from the 6- to 7.7 percent growth that his country’s GDP has been registering in recent years. TRAIN-generated inflation and the trade gap will see to that.