A peculiar slowdown

The second quarter (Q2) economic growth data reported last week was a letdown, with the 4.3 percent year-on-year gross domestic product (GDP) growth being slower than most analysts expected. Let’s examine more closely what happened, to get some clues on what we could possibly tweak to improve things hereon.

We’ve long taken some comfort from how having fewer external links makes our economy less vulnerable to external shocks in times of global troubles. At times like these, our handicap supposedly becomes a disguised blessing. Since the 1980s (or over four decades now), Indonesia, Malaysia, Singapore, Thailand, and Vietnam (i.e., our Asean-6 peers) have left us far behind in export earnings and foreign direct investments, which for them have been powerful income and job drivers. While this has kept us from creating enough jobs and incomes our people need—forcing millions to seek their fortunes overseas—it lessens the adverse impacts of a world slowdown on our economy. By this logic, our neighbors should now be seeing even worse slowdowns than us, making our backwardness a sort of blessing in disguise, right?

Alas, not quite. The Q2 numbers are also in for Indonesia, Singapore, and Vietnam, and guess what: they actually grew faster than in Q1. For us, the economy not only slowed down but actually shrank by 0.9 percent on a quarter-on-quarter (Q-o-Q) basis, corrected for seasonality—and yet our three neighbors had expansions. Our price increases have also been the fastest; our Q2 average inflation rate of 6 percent is nearly twice the average across our five peers (3.2 percent), ranging from Thailand’s 1.1 to Singapore’s 5.4 percent. What all this suggests is that while external pressures from the Russia-Ukraine war and renewed escalation in oil prices due to deliberate production cutbacks in the Middle East are partly to blame for our Q2 woes, that’s not the whole story. Internal weaknesses have as much to do with our worsening performance as do external forces we have no control over. If we are to make mid-course corrections to improve our full-year prospects, we need to improve things from within.

Philippine Statistics Authority data tell us that the largest downward pull came from the transportation and storage industry, which shrank by a hefty 17.9 percent between Q1 and Q2. Several things could be at play here. First is the end of “revenge tourism” that two years of deprivation unleashed last year when the pandemic eased. There are also generally lower volumes of goods to transport. Moreover, worsening city traffic may be leading people to shun face-to-face engagements and opt to work from home when there’s a choice. Indeed, information and communication services had the fastest Q-o-Q growth at 6.8 percent (translating to a zooming 30 percent annualized growth), also helped along by continuing growth in business process outsourcing or BPO.

Marked slowdowns are also seen in wholesale and retail trade, construction, government services, and the agriculture, fishery, and forestry sector, which hardly grew from last year at 0.2 percent in Q2, after growing 2.2 percent in Q1. The sector actually shrank by 1.0 percent between those two quarters, marked by a 7.5 percent drop in fishery and aquaculture output. These spell higher food prices down the line, worsening already escalating food prices overseas.

On the spending side, household spending slowed down precisely because of the dampening effect of surging prices. On top of that, government consumption spending fell 7.1 percent while construction spending barely grew at 0.8 percent. Reflective of the business climate, overall investment spending even shrank at -0.04 percent. Remarkably, our exports grew 4.1 percent even with slower global trade, suggesting that we can grow our exports with the right products and markets.

Moving forward, improved agriculture and fisheries, and expanded exports should be our key guideposts. We have good plans in place for both—the National Agriculture and Fisheries Modernization and Industrialization Plan (NAFMIP 2021-2030), and the Philippine Export Development Plan (PEDP 2023-2028). But we must put these plans into action.

---------------

THE ECONOMY NOT ONLY SLOWED DOWN BUT ACTUALLY SHRANK BY 0.9 PERCENT ON A QUARTER-ON-QUARTER BASIS