Fourth-quarter GDP rebound: It’s still possible

Introspective
Business World

THERE ARE BETS you’d rather lose. My good friend former socioeconomic planning secretary Ciel Habito and I have a running bet on the GDP growth for this year. His is optimistic at 7% and mine is conservative at just above 6% forecast. With the release of the third-quarter GDP growth at 5.3% last Thursday, it looks like I have a “free” lunch, care of Ciel.

We may disagree on our numbers, but Ciel and I both see that the key to higher growth lies in the government getting its act together. The government has much to do in terms of relieving infrastructure constraints to drive economic growth both in the short and long term. Short-term growth would be propelled by government spending for infrastructure and by construction of public-private partnership projects, long-term growth by the resulting improvement of connectivity and efficiency in the market attracting private investments that would create jobs and generate economic activity.


However, last quarter’s GDP growth dipped anew, dragged down by low government spending especially for infrastructure and by the poor state of road transport and seaports. It seems that the government is not doing enough to straighten out its troubles.

Back in July this year, we at GlobalSource wrote that “the setback caused by the Supreme Court decision on public spending as well as the slowness in decongesting the Port of Manila threatens 3Q14 economic growth” and proceeded to pare our 2014 GDP growth forecast to 5.8%. When August data showed better-than-expected second-quarter growth, we said that “the economy is not yet out of the woods in terms of bearing the costs of port congestion, which will feed into prices and economic activity in 2H14” but conceded a return to our start of the year 6.1% forecast.

And indeed third-quarter growth, reported at 5.3%, is way below the 6%-6.5% figures from journalists’ polls. Apart from government underspending (consumption and construction fell 2.5% and 6.2% respectively) and the seven-month-long gridlock at the main international seaport in Manila (despite its growth-boosting impact via weak imports, it may have also caused lower inventory buildup and on the supply side, an evident slowdown in transport and storage services), a mix of higher inflation and lower peso remittance growth saw household spending slowing down (to 5.2% in the third quarter from a revised 5.7% in the second quarter and 5.9% in the first quarter). At the same time, bad weather led to a 2.7% decline in agriculture, which is about 10% of GDP.

The much lower third quarter performance brought year-to-date GDP growth to 5.8%. With fourth quarter economic activity typically supported by Christmas festivities and upbeat consumer and business sentiments, what is the likelihood of fourth-quarter GDP reaching the 6.8% needed to achieve our latest 2014 forecast?

There is good news. Inflation is decelerating, port cargo movement has reportedly improved with the lifting of the local government’s truck ban, private construction shows momentum (12.7% in the second quarter and 15.7% in the third quarter), and despite the reported recession in Japan and slowdown in China, exports to these two major trade partners show robust growth (20% and 22% in nominal dollars, respectively, from January to September).

On the other hand, we continue to wrestle with the question of whether or not government can deliver on its promised spending. During the pre-DAP (Disbursement Acceleration Program), high growth periods, public sector consumption and construction together contributed anywhere from one to almost three percentage points of quarterly GDP growth. Hence, if government officials are rightly optimistic about rehabilitation spending gaining traction, a high fourth-quarter GDP growth is feasible. But how likely is it?

Part of this column was culled from a recent GlobalSource report written by Christine Tang and Romeo Bernardo. Mr. Bernardo is Philippine GlobalSource advisor and is a board director of IDEA.