August 10, 2019
ALTHOUGH gross domestic product (GDP) growth in the second quarter was expected to be modest for some obvious reasons, the official announcement Thursday that the economy grew by just 5.5 percent was an unpleasant surprise and should be viewed with concern.
The second quarter result was lower than the 5.6 -percent GDP growth recorded in the first quarter of the year, and was much lower than the 6.2-percent expansion in the second quarter of 2018. Government economic managers and most analysts had predicted that growth in the second quarter would be closer to 6 percent.
The slower second quarter growth was attributed to a number of factors. The delayed implementation of the 2019 budget and the pre-election ban on spending for new projects were said to be the key causes of lower growth. Other factors such as the lingering effects from the recent El Niño and the impact of interest rate hikes late last year, as well as growing global instability were also cited as reasons for slower consumption and lower-than-expected growth.
While none of these reasons is invalid, they do not completely explain the slowdown in economic growth, which suggests the solutions may need to be more than the normal policy responses.
The delayed implementation of the 2019 budget was indeed a serious handicap to growth in the first quarter; the government labored under a reenacted budget for the entire three-month period at the beginning of the year, and that was reflected in the first quarter’s unimpressive 5.6-percent print. The budget was enacted by mid-April, however, and thus was available for most of the second quarter.
Even taking into consideration the fact that the government could not immediately begin spending, in part due to the election ban, the growth rate still should not have been lower than in the first quarter. The impact of the election ban is a known risk, and should have been something the government was prepared for; in previous election years it has contributed to a decrease in the growth rate, but only on a very mild scale.
The negative effect of the El Niño in the second quarter was only felt in the form of water shortages around Metro Manila; most of the larger effects of the periodic climate phenomenon were registered in the first quarter and the latter part of 2018. While the water shortages most likely did cause a decrease in consumer spending, as government officials asserted, the shortages were relatively brief in duration, and could not have reduced GDP growth by a large amount. Interest rate hikes by the BSP months earlier likely did not have a great impact in the second quarter, either. Much lower inflation during the quarter indicates some slowing of spending, but again the effect should not have been greater than in the quarters in which interest rate hikes actually took place.
At this point, the economy will have to grow by an average of 6.45 percent over the next two quarters to reach the lower bound of the government’s 6 to 7 percent target range. With external pressures on trade and investment looking more likely to increase over the coming months, it is very difficult to be confident that “business as usual” — reassurances without details that “government spending will pick up” through the rest of the year — will be sufficient to lift growth as much as is needed.
To restore consumer and business confidence and spur faster growth, the government should spell out a specific plan of action. After all, if businesses and consumers — who are broadly supportive of the administration — know what it is, they can contribute to it success.
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