Business World
Posted on June 01, 2014 09:26:19 PM

V, J, or L?

Introspective
Romeo L. Bernardo

WAS I surprised that first-quarter GDP growth was “only” 5.7%? No. We in Global Source have maintained a below-consensus full-year forecast of 6.1% since early this year, expecting the first two quarters to be on the weaker side given the boost from election spending last year. Despite successive growth upgrades by other analysts, we continued to maintain our forecast in our latest outlook report released early this month.

But in contrast to equity market players who sold on the news causing a 111-point (1.6%) drop in the main stock index, I think the 5.7% growth figure not bad at all. As the Planning Secretary said in his statement, the Philippines is still the third fastest growing economy in the region (even with the lingering destructive effects of last year’s natural disasters). The slower growth, in my view, also helps in injecting a dose of realism into overly bullish growth expectations that many fear will lead to asset bubbles and cloud prospects for sustained expansion over a longer horizon.

First quarter 2014 performance owed mainly to a robust 5.8% growth in household spending. After four quarters of high double-digit growth, investment growth slid to 7.7% in Q1 as private construction declined 6% even as public construction grew 22% on a reported mix of infrastructure projects. Overall investment growth is traced mainly to durable equipment, which grew by 21.6%, reflecting high growth in “air transport equipment” (related to domestic airlines’ refleeting program) and “other general industrial machinery.” Export recovery generated a small trade-in-goods surplus that was offset by the deficit in services trade. From the production side, all service sectors grew steadily, industry and manufacturing growth slowed down, while agriculture managed less than 1% growth.

Is the Q1 economic performance just a blip or will growth henceforth be more “normal”? Visually, should we expect GDP growth to be V-, J- or L-shaped?

Government, which is keeping its 6.5-7.5% full-year target, is surely hoping for a V, or at least a short-hooked J. This seems possible considering extraordinary factors dampening Q1 growth that included not only base effects but also disaster-related losses in (a.) agricultural crops that also dented food manufactures, and (b.) tourism and insurance receipts. On its own, government also has the wherewithal to quickly push up growth by speeding up delayed rehabilitation and reconstruction work in disaster-affected areas.

On the other hand, an L is also possible depending on the severity of some of the newer developments we noted in our last report (including the Manila City truck ban, El Niño, other infrastructure constraints especially power). Plus, the revived pork barrel scandal may again have a negative impact on public spending, especially after the budget secretary, who has been the one spearheading reforms to increase the transparency of budget processes and quicken disbursements, was included among the hundreds of former and present lawmakers implicated by the alleged mastermind of the scam. The latter tagged him as being the real mastermind who mentored her. While we find this simply bizarre, even by Philippine political tragicomedy standards, there is still the risk that a major misstep in handling the scandal will cost the administration invaluable political capital necessary to keeping business confidence up in the short-term (and even beyond 2016).

Barring another political crisis, we are keeping our 6.1% annual forecast at this time, with the quarterly growth along a curve that gently slopes up. I do not expect growth to return to the 7% level mainly because of infrastructure constraints that, notwithstanding much publicized expressions of interest, will continue to deter actual private investments. However, I am becoming more confident that government will be able to meet expenditure targets, especially with increasing media attention on the slow pace of reconstruction work, and thus, expect GDP growth to improve in the second half of the year.

(This column was culled from a recent GlobalSource report written by Christine Tang and the columnist. The author is Philippine GlobalSource advisor and is a board director of IDEA.)