The economy is probably in bigger trouble than this week’s surprisingly bad news about third-quarter GDP growth indicated.
To call the 5.3 percent GDP turnout “unexpected” is an understatement; nobody was even close to guessing the Philippines’ economic expansion in the third quarter was that slow. The most pessimistic of the forecasts from the analysts polled by The Manila Times the day before the release of the official data was 0.4 percent too high, my own estimate sailed over the mark by 0.6 percent, and the unofficial but commonly assumed government expectation of 6.5 percent growth was even more unrealistic.
In the aftermath of the disappointment on Thursday, government officials and private analysts alike offered the same explanation for it: Contractions in government spending and agricultural output significantly reduced the gains made by the private sector. Assuming private sector activity remains strong, the prospects for increased government spending and the recovery of agriculture from the effects of severe weather in the last quarter and the lingering ill effects of last year’s Typhoon Yolanda should put the country back on the sort of growth path everyone expects.
That is a rather glib assessment, as even a cursory examination of the data shows. Government spending and agricultural output did, indeed, shrink year-on-year, by 2.9 percent and 2.7 percent, respectively. But even though the rest of the economy did register some growth, growth rates for all three broad sectors (agriculture, industry, and services) and nine of the 12 component sectors were lower year-on-year, and in some cases much lower. Manufacturing growth slowed to 7.2 percent compared with 8.9 percent last year; utilities decelerated by more than 5 percent, posting a 3.3-percent growth rate in the third quarter compared with 8.4 percent a year earlier. Real estate had a similar decline, slowing to 6.2 percent from 11.6 percent in the same quarter a year ago, and financial intermediation (i.e., banks and other financial services) grew 7.7 percent, versus 12.1 percent in the third quarter of 2013.
Looking at the results from an expenditure rather than an output perspective is not any more encouraging. Household final consumption expenditure, a big driver of the economy, grew at a rate of 5.2 percent, half a percentage point lower than a year ago. Capital formation, a catch-all of business activity, did improve considerably, posting a 3.6 percent increase versus a nearly 1 percent retraction in the same quarter last year, driven by big gains in construction and durable equipment. These were offset, however, by something many analysts (present company included) feared would happen as a result of the country’s odd imbalance of high exports and shrinking imports: Changes in inventory registered a 75 percent decline, which was almost 15 percent less inventory than a year ago. Inventories typically do tend to shrink in the third quarter, but this year’s drawdown arguably exceeded what would be considered the norm. And for all the positive recent news of strong exports, export growth actually slowed this year compared with the same quarter last year, 9.8 percent versus 10.5 percent.
As for the government underspending that was widely tabbed as the chief culprit behind the third-quarter slowdown, the explanation offered by Budget Secretary Florencio “Butch” Abad was that “the decrease was largely caused by the low utilization of notice of cash allotments (NCAs) by government departments and agencies, which, in turn, affected the implementation of public infrastructure projects.” Abad also blamed the Supreme Court’s ruling against the Administration’s “Disbursement Acceleration Program” (DAP), “as the ruling may have sent a chilling effect across the bureaucracy’s expenditure practices.”
Abad, besides spewing a venal insult to the intelligence of anyone who understands the English language, unintentionally also admitted that he is a complete failure at his job as the nation’s budget manager. An NCA is essentially the final step in an expenditure authorization process; any “effect” on the “expenditure practices” occurs earlier, or at least should, with the NCA serving as an assurance that Abad’s office has ascertained the validity of a proposed expenditure by a government office—“low utilization of NCAs” is, in other words, a failure on his part to follow up, which explains why his statements to the press after the release of the GDP figures indicating a sharp decrease in government spending sounded like they were coming from someone who was hearing the news for the first time.
And while the formal Supreme Court ruling banishing the DAP occurred on July 1—the very first day of the third quarter—it is worth remembering that much earlier during the Court’s drawn-out hearings on the matter, on January 28 to be specific, then-Solicitor General Frank Jardaleza told the Court that the DAP program had ended in mid-2013, which raises a valid question as to why the DAP would still be playing a role in government spending more than a year later.
Taken altogether, the results of the third quarter paint a grim picture. The indicators show—just as this column has been pointing out for weeks now—that the economy is slowing. One particularly worrying indication, for example, is that a property bubble is, indeed, forming, as suggested by the mild slowdown in household consumption and the significant deceleration of both real estate and banking activities while construction expanded at a robust rate. On top of that, the government—whose spending does not prop up the economy on its own, but does help to support wider economic activity—either has less than honest intentions or is completely clueless in its approach to economic supervision. The next 18 months the country must endure before the Aquino Administration can be seen out the door may be trying ones.