July-Sept expansion led by service sector
Philippine economic growth accelerated to 6 percent in the third quarter, the government reported on Thursday, with support from services making up for a slower industry sector.
The result, an improvement from the upwardly revised 5.8 percent recorded three months earlier, puts the country in line for full-year growth of 6 percent, a Cabinet official said.
The central bank said the growth pace meant the economy – whose growth Socioeconomic Planning Secretary Arsenio Balisacan said had been topped only by China and Vietnam in the region—did not require a stimulus.
Balisacan warned, however, that remained. With the Aquino administration set to step down next year, he urged the next government continue needed reforms.
The 6 percent gross domestic product (GDP) growth rate fell within the 5.8 percent to 6.5 percent forecast range in Manila Times poll of economists. Analysts on Thursday said were unlikely to revise their full-year outlooks.
Year to date, GDP growth improved to 5.6 percent, still below the government’s target of 7 percent to 8 percent.
The Philippine Statistics Authority (PSA) said third quarter growth was led by the service sector, which expanded by 7.3 percent—the highest since the 7.4 percent recorded in the third quarter of 2013.
Agriculture posted a 0.4 percent recovery from a 2.6-percent decline a year earlier.
The industry sector, on the other hand, saw growth slow down to 5.4 percent from 7.8 percent in the same period last year.
“Among the three major economic sectors, services gave the highest contribution to the GDP growth in the third quarter with 4.2 percentage points. This was followed by industry with 1.8 percentage points while agriculture contributed 0.03 percentage point,” the PSA said.
The National Economic and Development Authority (NEDA) said the 6 percent growth made the Philippines one of the fastest-growing Asian economies next only to China’s 6.9 percent and Vietnam’s 6.8 percent.
“Strong domestic demand fueled output growth, led by significant improvements in government spending and household consumption,” Balisacan, who is the NEDA chief, told reporters in a press briefing.
He said the third quarter saw an improvement in the public sector’s performance, with government final consumption expenditure increasing from 3.9 percent to 17.4 percent—an indication that the state was overcoming spending bottlenecks that hampered growth in the first semester.
Household consumption also grew by 6.3 percent on the back of the more jobs, increasing employment and income, low inflation and inflow of overseas Filipino remittances.
Both public and private sector investments remained strong as capital formation rose by 8.9 percent, a reversal of the 0.2-percent contraction seen in the same period last year.
Balisacan, however, noted that the country recorded a P58.8-billion trade deficit – from a P7.3-billion surplus last year – as the global economy remained weak. In particular, net exports fell by 906.4 percent.
The NEDA chief said the agriculture sector was weighed down by an ongoing El Niño, with a drought having limited crop yields.
“The slight improvement in the sector’s performance is largely contributed by stronger growth in livestock, poultry, and fishery subsectors,” he said.
With regard to trade, he noted that improvements of goods and services were robust at 13.5 percent compared to last year’s 4.7 percent, supported by an increase in the importation of capital goods, and raw materials and intermediate goods.
“These are expected to translate to more outputs in the fourth quarter and beyond, which will set the stage for the improvement of our exports by next year, given the US recovery and stimulus spending in Japan and other emerging economies like China,” Balisacan claimed.
Growth to continue, risks remain
He said the growth trajectory would likely continue in the fourth quarter as domestic demand would pick up during the holiday season. An additional boost is expected from low inflation, low oil prices and election spending.
“Moreover, the services sector will remain strong and investments are likely to go up due to the expected increase in disbursements,” Balisacan said.
To reach a full-year growth of at least 6 percent, he stressed that the economy should grow by 6.9 percent during the last quarter.
The NEDA chief warned that some risks remained, among them the continuing El Nino and uncertainties arising from next year’s impending change in government.
“We need to remain focused on ensuring that the economy is on the right path as political changes take place,” he said.
“What is important is that we do not lose sight of our goals, and we know the factors that have been holding back the economy from reaching its full potential,” he added.
Balisacan called for continued governance reforms and greater investments, particularly in infrastructure and human capital to achieve rapid and inclusive growth.
“With sound fundamentals built from relentless pursuit of governance and economic reforms, we are optimistic that the new administration will not find it difficult to traverse an even higher growth path,” he said.
Analysts retain 2015 outlook
Private analysts, meanwhile, said they were retaining their full-year GDP forecasts despite the 6-percent third quarter expansion.
Analysts from ANZ Research, London-based research consultancy Capital Economics, equities firm Accord Capital Equities Corp. and United Kingdom-based investment bank Barclays expect 2015 growth to fall within the range of 5.5 percent to 5.7 percent.
Eugenia Victorino, economist at ANZ Research, said consumption growth in the Philippines was enjoying firm momentum despite disappointing remittance growth, supporting the view that the economy was slowly diversifying away from a traditional reliance on remittances.
Weaker trade and a persistent failure of the government to ramp up spending, however, is capping the growth in domestic demand, Victorino claimed.
“We stand by our GDP growth forecast of 5.7 percent in 2015 before rising to 6 percent in 2016 likely boosted by election-related spending,” she said.
Capital Economics, meanwhile, said the economy was still on track to grow by around 5.7 percent in 2015.
Although the economy did not gain as much momentum as expected in the third quarter, it remains one of the region’s bright spots, Senior Asia economist Daniel Martin said.
“What’s more, we think that improvements to the business environment under the current president, Benigno Aquino [3rd], will underpin healthy growth even after he leaves office next year,” he said.
Martin added that the medium term outlook for the Philippine economy was obviously dependent on the choice and performance of the next president.
“However, it would take a spell of very bad governance to undo the progress made under Aquino, and we expect the economy to continue growing strongly. We expect growth of 6.5 percent in 2016 and 2017, which is above the consensus of 6 percent for both year,” he said.
Justino Calaycay Jr., analyst at Accord Capital Equities Corp., said the third-quarter GDP growth result validated confidence that the domestic economy, though not immune from external headwinds, would keep growing at an average pace of 6.2 percent.
“If the momentum of the year where each quarter posted sequentially improving numbers, we should be in for a pleasant fourth-quarter growth particularly if consumer spending picks up during the holidays,” he said.
“Nevertheless, it will take a lot for us to be able to reach the 6.5 percent bottom target by the government. A mere replication of the 6 percent of this quarter will only translate to 5.7 percent for the year—in line with our projection,” he noted.
Barclays, lastly, said it remained comfortable with its 2015 growth forecast of 5.5 percent even though the third-quarter GDP print was above the investment bank’s expectation.
“We had recently downgraded our 2016 growth forecast to 5.5 percent from 6 percent earlier,” economist Rahul Bajoria said.
BSP says policy appropriate
The third quarter expansion, the Bangko Sentral ng Pilipinas (BSP) said on Thursday, affirmed a decision to keep key interest rates unchanged.
“GDP turnnout confirms that the economy doesn’t really need further monetary stimulus at the moment,” central bank Governor Amando Tetangco Jr. said in a text message to reporters.
Earlier this month, the BSP’s policy-making Monetary Board kept key interest rates unchanged based on its assessment of inflation dynamics and risks to the outlook.
The central bank’s overnight borrowing and lending rates were kept at 4 percent and 6 percent, respectively. The special deposit account (SDA) rate was also held steady at 2.5 percent, while the reserve requirement ratio for banks still stands at 20 percent.
Nevertheless, Tetangco monetary authorities remained mindful of risks from natural disasters and global developments, including slower than expected growth among the country’s trading partners.
“Further, inflation is seen to have bottomed last month. As such we believe monetary settings continue to be appropriate for now. In addition to risks already mentioned we monitor commodity price development,” he said.