Economic growth is weaker than what the headline number suggests
Last week, the government announced that gross domestic product (GDP) in the first quarter expanded by 5.7 percent. At first glance, growth seemed pretty good. Although it was below the consensus forecast of 5.9 percent, it was faster than the fourth quarter’s 5.5-percent increase.
Nevertheless, a more detailed analysis would show a much weaker economy than what the headline number suggested.
Household consumption, which accounts for 75 percent of GDP, grew by only 4.6 percent. This is its slowest growth since the first quarter of 2021.
High inflation is hurting Filipinos’ spending power. Recall that inflation was very high last year, reaching an average of 6 percent, largely driven by rising food prices. Although headline inflation averaged only 3.3 percent during the first quarter of 2024, the low number was largely due to base effects as food and oil prices were elevated during the same period last year.
However, the inflation problem is not yet over. Because of El Niño and our country’s dependence on imports, the price of rice, which accounts for around 9 percent of the typical Filipino consumption basket, is up by around 24 percent year-on-year.
Meanwhile, despite being down compared to the first quarter last year, the price of oil was up by around 15 percent on a year-to-date basis as of end March. Because of this, consumers are allocating a larger portion of their budget on food and transportation, leaving them with less to spend on other discretionary items.
Household consumption will most likely stay weak unless the government successfully addresses the inflation problem. Recall that because of inflation, it grew by an average of only 5.6 percent last year. By contrast, it averaged 6.2 percent during the five years prior to the pandemic.
Likewise, gross capital formation or investment spending growth decelerated to only 1.3 percent after accelerating to 11.6 percent in the fourth quarter of 2023. High level of interest rates most likely caused businesses to delay or forgo expansion plans.
Finally, government consumption was very weak in the first quarter, increasing by only 1.7 percent year-on-year.
Although I was initially hopeful that higher government spending would help offset the negative impact of high inflation and interest rates on household consumption and gross capital formation, I might have been too optimistic. After all, the government is not positioned to aggressively pump prime the economy given that its debt to GDP ballooned to a high of 60.9 percent as of end2022 because of the pandemic.
Under the Philippine’s medium-term fiscal framework, the government is working on reducing debt to GDP to below 60 percent by next year and to 51.1 percent by 2028. The only way it can do such is by slowly reducing its budget deficit.
This year, the government is targeting to bring its budget deficit down to 5.1 percent of GDP from 6.2 percent last year. Since there are no plans to implement new taxes, the government has no choice but to spend prudently to meet its target.
The main reason why headline GDP growth in the first quarter still exceeded 5 percent was the 7.5-percent increase in exports. Although the strong performance of exports is good, it is unclear if the increase is sustainable, especially against the backdrop of a weak global economic environment.
Because of the disappointing GDP numbers, the stock market fell last week. This, despite the rebound in most global equity markets fueled by the decline in bond rates and the weakening of the US dollar.
Although I don’t expect the Philippine Stock Exchange Index to drop to a new low, it might be difficult for it to reach a new high as weak economic growth could negatively affect corporate earnings growth. This, in turn, would negatively affect investor sentiment and cause them to stay away from the stock market in the short term, especially given the prevailing high interest rates, which make fixed income investments a more attractive alternative.