Jaded Cassandra though I may be, even I was struck by the resemblance of the front page of Saturday’s edition of our business section to a wet blanket. Contrary to popular belief, we do not actually look for bad news to print; all things being equal, we’d rather publish something upbeat. But it seems that we are seeing headlines like these with increasing frequency:
“IMF outlook for PH growth dims to 6.2%”
“May imports slide 9.6%”
“Lackluster PH market edges downward”
It would be unnecessarily alarmist to characterize the Philippine economy as being “in decline,” but there is a growing sense that the growth engine is slowing down; two weeks ago, banking giant HSBC suggested the economy is suffering from “fatigue,” a description that seemed particularly apt. The economy is not necessarily bad but it seems to lack direction, and the assessments of analysts presented in our special report yesterday (“The elusive inclusive growth”) tend to reinforce that perception.
The broad reason for the loss of enthusiasm is that sometime in the third quarter of last year, the honeymoon period of the Aquino Administration—the period of time in which economic optimism could be sustained by the combination of positive rhetoric, adequate monetary policy, sustained high levels of consumption, and the country’s relative isolation from external shocks—finally ended with the realization that the effects those positive attributes should have had were not perceptible in any substantial way. There was no progress against the chronic challenges that are cited ad infinitum as the obvious obstacles to growth—persistent poverty, unemployment, lagging infrastructure development and general institutional dysfunction—and most distressingly, there did not appear to be any clear plan to address them.
The withdrawal of the benefit of the doubt was not simply based on impressions, but on real numbers. The 5.7 percent GDP growth rate for the first quarter of this year came as a nasty surprise for the Administration and most analysts (the closest anyone came to forecasting the eventual result was an estimate of 6.0 percent by HSBC), but once the numbers behind the indicator were broken down, it was not too difficult to see what was happening.
Comparing the first quarter of 2014 with the first quarter of 2013—when the GDP growth rate hit a stratospheric 7.7 percent—we can see that household consumption, the biggest single component of GDP, actually increased (growing 5.8 percent versus the year-earlier rate of 5.4 percent), and the trade deficit, while still in fact a deficit, improved by more than $650 million.
What dragged GDP down in Q1 2014 was the virtual collapse of government and other long-term spending: Government spending grew by just 2.0 percent compared to a 10 percent growth rate in Q1 2013, which, when combined with the first quarter average inflation rate of 4.1 percent meant that government spending actually retracted in the first quarter of this year. The capital formation component of the GDP was tepid as well, growing only 7.7 percent in Q1 after exploding at a 49.8 percent growth rate in Q1 2013. The biggest drop among the capital formation sub-components was construction spending; in Q1 2013, it grew 33.9 percent year-on-year, but in the same period this year, it declined by 0.9 percent.
Government spending and construction are exactly the areas constantly cited by analysts when asked the question, “What does the Aquino Administration need to do to maintain/accelerate economic growth?” and they are exactly the areas in which the economy took a downturn. And quite unexpectedly, too, because the assumption prior to the release of the Q1 data was that the enormous reconstruction effort needed in the wake of last year’s Typhoon Yolanda should have made growth in government spending and construction more or less involuntary. The bump in household consumption, not enough to make a difference anyway, we now know was largely attributable to the beginning of the climb in food and basic commodity prices, and so was kind of misleading; spending remained strong, but it was shifting towards more basic necessities and less discretionary spending.
All of this could be spun to paint a picture of an economy on the verge of collapse, but at this point that would be a little dishonest, because that is not at all the case. At least not yet. The country still has a sound financial system, robust remittance income, and a fairly healthy corporate sector. If nothing changes in the Administration’s approach to economic policy, the economy will not collapse, but simply drift.
That will ultimately be catastrophic if the trajectory does not change, but probably not before Aquino leaves in 2016. This is why our favorite analysts have a more upbeat view of the next few quarters than perhaps I do; putting together the few, but substantial, strengths of the economy with the notion that the main solution—significantly increasing government investment in value-added hard projects—should be glaringly obvious to even the densest, most detached policymakers, they see economic growth in terms of GDP being slightly higher than the first quarter’s disappointing turnout, with estimates ranging from 5.9 to about 6.5 percent.
If they were looking for signals in President Aquino’s State of the Nation Address yesterday afternoon, however, they were undoubtedly disappointed. What they would have liked to have heard were clear plans for infrastructure development, solutions to the looming power crisis, some direction on smaller (but growing) problems such as the congestion of the Port of Manila and the moribund state of Manila’s international airport and commuter rail system, and some reassurance that obvious threats to political stability such as the troubled Bangsamoro peace accord and the tense controversy over the DAP were being addressed. What they got, instead, was just about what everyone expected—a combination of campaign rhetoric and praise for one-off, unconnected achievements, with little indication of what direction the country will take in the all-important run-up to next year’s Asean integration.
Which in a weird way is probably appropriate; the economy is robust enough to outlast Aquino, so the risk assessment at this point very well may be that it will be better off if he does exactly what he is doing now—standing in the wheelhouse of the ship of state, genuinely baffled by what that big round thing in front of him is, but content that the ship seems to be going somewhere on its own anyway.