Q2 economy grows 7%

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THE Philippine economy expanded by 7 percent in the second quarter from 5.9 percent a year earlier, bringing first-half growth to 6.9 percent, the government reported on Thursday.

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The second-quarter results showed an improvement from the 6.8 percent gross domestic product (GDP) rate in the first quarter, which reflects a downward revision from 6.9 percent originally estimated for that period.

GDP expanded by 6.9 percent in the first six months of 2016—or at the upper end of the 6 percent to 7 percent official target—from 5.5 percent a year earlier.

Finance and economic managers said this expansion will enable the Duterte administration to keep its growth targets on track for the rest of the year.

The central bank said the GDP results support the stable monetary policy settings in the country.

The 7-percent GDP growth rate fell within the 6.1 percent to 7.2 percent forecast in a Manila Times poll of economists. Analysts said the second quarter momentum supports a continuing expansion in the remaining months of the year, with the full-year numbers likely ranging from 6.2 percent to 6.7 percent.

Growth drivers
“Growth is within market expectations, given average consensus forecast of 6.1 percent to 7.2 percent for the second quarter,” Socioeconomic Planning Secretary Ernesto Pernia said in a press briefing in Davao City.

That growth was fairly broad-based on the supply side driven by gains in the industry and services sectors.

The industry sector grew by 6.9 percent from 6.1 percent year-on-year, supported by manufacturing, construction, and utilities.

The services sector recorded an 8.4-percent increase, traced to trade, transport communication, public administration and real estate, renting and business activities.

But the performance of the agriculture sector was a negative 2.1 percent due to the lingering effects of the El Niño phenomenon.

On the demand side, investment posted the highest contribution of 5.7 percentage points to the GDP.

Investment in durable equipment registered an increase of 42.8 percent and private sector investment in construction, which grew to 8.3 percent from 8.1 percent in the first quarter, was driven by stronger business confidence and low interest rates.

Public spending remained strong, supported by the boom in public construction and government consumption, which grew by 27.8 percent and 13.5 percent, respectively.

Private consumption was stronger as a result of low inflation and interest rates, improved labor market conditions, and steady consumer confidence.

“Overall, domestic demand growth accelerated to 12.3 percent from 12.0 percent in the first quarter of 2016,” Pernia, who is also the NEDA director general, said.

Fastest in Asia
The agency noted that among the Asian economies, the Philippines was likely the fastest or second fastest-growing economy in the second quarter.

It was followed by China, which grew by 6.7 percent, Vietnam by 5.6 percent, Indonesia by 5.2 percent, Malaysia by 4.0 percent, and Thailand by 3.5 percent.

“Data for India are not yet available but some forecasts put it above 7 percent,” Pernia said.

2nd half risk
“Moving forward, despite the good numbers for the first six months of 2016, there is still a risk of seeing a lower growth rate in the second half of the year,” Pernia said.

During an election year, it is normal to see a slowdown in the second semester with possibly 1.5 to 2 percentage points shaved compared with the first half numbers.

“This is a normal occurrence during election years. Consumer sentiment will also likely normalize given the post-election season,” Pernia said.

“What is important is that government continues the smooth transition of power and commits to its agenda of maintaining a consistent macroeconomic policy so that business and consumer confidence will remain strong,” he said.

“Also, we shouldn’t forget that we will need to continue the recovery efforts from the El Niño phenomenon to get the agriculture sector back on its feet,” he added.

Over the medium-term, the Cabinet official emphasized that the administration is aiming for a steady acceleration of growth toward 7 percent to 8 percent, and banking on sustained and deeper reforms.

These include a comprehensive tax reform, sustained investment in infrastructure, easing of restrictions on foreign investment, lower cost of doing business, and strengthening of agro-industrial linkages.

The Duterte administration would build on previous efforts to effectively implement its 10-point socioeconomic agenda, Finance Secretary Carlos Dominguez 3rd.

“The numbers are good for the Duterte government to hit its growth targets of at least 7 percent this year’s second semester and 6.5 percent to 7.5 percent in 2017,” Dominguez said in a separate statement.

“We aim to sustain and even boost this strong growth momentum by accelerating spending on infrastructure and investing heavily in human capital, along with overhauling the tax system and rationalizing fiscal incentives to further stimulate the economy,” Dominguez said.

“But we still have a big task ahead of us to lower the poverty rate that have been stuck at 26 percent of our population,” he added.

Challenges
NEDA warned of a developing risk in La Niña that will likely intensify between August and October this year.

“This highlights the urgency of crafting holistic agriculture development policies that include disaster resiliency. This will benefit workers from the sector, which employs the biggest chunk of our labor force,” Pernia said.

The Department of Agriculture is crafting an action plan that identifies the most vulnerable municipalities, focusing on appropriate interventions, preparedness, response, immediate recovery, and rehabilitation.

“We are thus concerned about the decline in the output of agriculture and fisheries, for five quarters in succession,” Pernia noted.

Knowing the majority of poor Filipinos rely on agriculture for their livelihood, the administration will prioritize agricultural development within the broader framework of rural and regional development, he said.

Above 6% H2 forecast
Economists from London-based research consultancy Capital Economics, HSBC, Metrobank Research, and Bank of the Philippines Islands (BPI) are betting that the economy could expand by 6.2 percent to 6.7 percent.

Economist Gareth Leather of Capital Economic said its full-year 2016 growth forecast was raised to 6.7 percent from 6.5 percent based on the first half performance.

“In the short-term, the economy looks well placed to continue growing at a strong pace. With inflation benign, the central bank looks set to keep interest rates low which should support investment,” he said.

Recent improvements in the country’s business environment will help to grow the economy.

“Consumption should remain buoyant, supported by rapid wage growth and healthy household finances. A strong fiscal position means there is scope for the government to boost spending. Duterte has already said he intends to run a looser fiscal policy than his predecessor,” he said.

HSBC economist Joseph Incalcaterra said the Philippines is on track to meet the government’s official target this year.

It sees growth at 6.3 percent.

“The election impact will fade out in the second-half 2016, and base effects will turn less supportive (infrastructure expenditure started to take-off in second-half 2015), but the fundamental drivers of growth will nonetheless remain intact,” he said.

Private consumption should stay resilient as peso-denominated remittances continue to grow apace and the rise in government infrastructure spending is boosting employment in construction and other related sectors.

Despite the concerns about long-term growth, business process outsourcing employment remains a key driver of employment expansion for now, Incalcaterra said.

Metrobank Research kept its 6.3 percent full-year forecast as it expects the second half growth to be lower than the first half, noting the boost from election spending will fade and the base effects from the strong growth in the third and fourth quarters of 2015 will kick in.

“Consumption spending will remain robust amid the still soft commodity prices, low interest rates, and solid remittance inflows,” it said.

The agriculture sector will remain weak amid unfavorable weather conditions, while risks to the domestic economy remain with the effects of uneven global growth and financial market volatilities, it warned.

BPI’s forecast remains at 6.2 percent as household consumption and consumption- related investment carry the load.

“The wild card will be the ability of government to enact its very aggressive spending program as government under spend has been the missing link to our recent growth spurt,” said BPI associate economist Nicholas Antonio Mapa.

The recent struggles of exports, given the tepid external demand, may soon reverse as six straight months of inventory build-up suggests an eventual improvement in the trade deficit.

Stable monetary policy
“The economy continues to expand and does not need additional monetary support,” BSP Deputy Governor Diwa Guinigundo told reporters in a text message.

Monetary authorities would expect that with ample liquidity and credit available in the system, higher domestic demand from stronger public spending will sustain the country’s high growth path.

“With more confidence in the Philippines’ growth prospects and commitment to policy reforms, we are confident the growth targets for the next few years are very doable. Infra and social spending remain critical,” Guinigundo said.

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