When the term of President B.S. Aquino 3rd comes to its long-awaited end, whenever that is, one of the remarkable economic achievements his Administration will legitimately be able to claim is to have rendered GDP growth completely irrelevant as a measure of the country’s economic growth.
I’ll admit I was surprised by it yesterday; not by the Q2 growth rate itself, which at 6.4 percent was only slightly higher than my own prediction (which was 6.2 percent), but the fact that the reaction to the news from most quarters was a hearty “So what?”
The stock market, for instance, greeted the announcement by promptly dropping nearly 60 points.
Outwardly, the economic performance of the second quarter deserves better than a lukewarm response. The 6.4 percent GDP growth broke a string of three straight quarters of declining growth rates. It was significantly higher than Q1’s 5.6 percent (which was by itself a pretty respectable growth rate), and the benchmark on which it was based was the quarter last year in which the bulk of election spending occurred.
There are a couple of reasons why it may fail to excite the business sector and the public, however. First, even though the Q2 figure is perfectly respectable, it is still below expectations.
Over the past five or six years, the Philippines has graduated to that segment of emerging economies which are expected to grow rapidly for an extended period of time, something like what China did last decade but on a much smaller scale. The reason for this is that the economy has a considerable amount of “catching up” to do; the overall size of the economy is not that impressive by developed-country standards, so in order to demonstrate real progress, it has to expand at a rapid rate. In that context, growth in the 7 percent range or higher is just considered “normal,” and when the growth rate is below that for a couple of quarters in a row, it is taken as a bad sign.
The second reason is that a positive GDP growth rate is incongruent with most consumers’ experience. Part of that can be attributed to the time delay; we are at the end of the second month of the third quarter, considering economic performance of a period that ended two months ago. People make comparisons to their current circumstances, and are inclined to disagree with or disregard ‘high GDP growth” when their understanding of the state of the economy is based more on unattractive indicators of rising commodity prices, shortages of some basic goods, high power costs, stagnant wages, and unemployment.
Even though the perceptions are largely mistaken – the published GDP rate compensates for inflation, and the GDP figure does not apply to things like wages and unemployment anyway – they cannot be discounted, especially when negative sentiment is being aggravated by the trust deficit this particular administration has created.
For example, prior to the release of the Q2 figures on Thursday, the NEDA and the Department of Finance repeatedly offered public assurances that Q2’s growth rate would be much higher than Q1’s “disappointing” 5.6 percent – the DOF even specified a Q2 figure of 7 percent – in part because government spending had “increased by 45 percent in June.”
Yet when the Q2 figure was finally released, most every component of the GDP calculation was positive except for government spending, which was flat. In nominal terms, it actually retracted a bit; in current prices, government spending actually advanced 3.2 percent, but that was against an inflation rate of about 4.3 percent for the quarter.
Worse still, in the various commentaries offered by government officials after the GDP release on Thursday, the story emerged that government agencies had not, in fact, actually increased their spending at all, but rather had scaled back their disbursements for ‘personal services’ and ‘maintenance and other operating expenses,’ two categories that usually account for a great deal of spending.
Without that problem, the fact that the GDP growth rate was 6.4 percent instead of 7 percent would have just meant the government forecasters were wrong—an annoying, but forgivable outcome. But telling everyone that government spending had increased, and not just increased but increased by a specific amount (although to be fair, the “45 percent” was offered without context), and then backtracking to admit that, no, that did not, in fact, happen at all makes the government sound worse than wrong; it makes them sound dishonest.
According to what GDP measures, the economy is doing well; there is no getting around that fact. But, as has been pointed out before—just about every time new GDP figures are released, actually —GDP is an incomplete picture of the economy as a whole. Without denying policymakers their privilege to be pleased that GDP performance continues to be robust, we should remind them that it is only part of the story, one that is going to be completely meaningless if other aspects—prices, wages, income inequality, and capital and job creation—continue to be given short shrift.