Down the Slide

The World Bank expects Philippine GDP growth to continue to slow down to 4.5% in 2005

By Michael B. Mundo

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In November 2004, the World Bank upgraded its Gross Domestic Product growth projection for the Philippines for 2004. This was contained in its East Asia Update publication which stated that Philippine GDP is seen to grow by 5.4% in 2004 from its original expectation in April 2004 of 4.2%.

First Semester 2004 Growth

The revised World Bank outlook reflects the surprisingly robust 6.3% [later revised to 6.6%] performance in the first semester, led by the services sector [revised to 7.4% from 6.9%], especially in the transport, communications, and storage subsector [revised to 11.9% from 11.4%]. At the same time, industry likewise performed well, growing by 5.6%, especially in the construction subsector [revised to 11.5% from 11.6%]. "Agriculture, fishery, and forestry," the Update reports, "grew by 6.0%."

Back up

The report further explains that on the demand side, consumption was again the main driver of growth, expanding by 5.9% [later revised to 6.0%]." The growth in personal spending, the Update observes, "was surprisingly strong given the limited growth in remittance flows during the period, probably due to election-related uncertainties." Gross domestic capital formation made a limited contribution to GDP growth. The World Bank also credits the 9.7% growth of exports, particularly electronics products, in the first half to the strong growth performance of the economy.

Despite the strong economic growth, the World Bank notes that the country's unemployment rate of 11.7% - though lower in July 2004 compared to the jobless rate a year ago - remains high. The worrisome unemployment rate was aggravated by the decline in family income and expenditures in 2003 from their levels in 2000 and the increase in severity of hunger in the third quarter. In October, the country's jobless rate actually eased down to 10.9%.

Slowdown Follows

The pace of growth since the first half of 2004 is "likely to slow given the increase in oil prices, rising domestic interest rates, and the prospect of higher international interest rates, large public sector deficits and external financing requirements amidst uncertain prospects for fiscal adjustment." True enough, GDP growth slowed down to 6.3% in the third quarter from 6.6% in the first semester.

"Continuing fiscal weaknesses" threaten the sustainability of this year's strong growth. The World Bank, however, believes the country's public sector deficit will turn out to be lower than programmed and closer to the 2003 ratio to GDP. While the Bank is aware of the Philippine government's objective to have a balanced budget in the medium term and of the eight tax measures to address the country's fiscal weakness, it also calls attention to the "quality of fiscal adjustment to put in place a sustainable, buoyant, and efficient tax system."

For 2005, the World Bank expects Philippine GDP growth to continue to slow down to 4.5%. The Bank warns of the urgency of fiscal reforms given the "increasingly difficult external environment." The World Bank also expects inflation pressures to remain on the supply-side, pushed by high food and energy, particularly oil, prices, downplaying demand-side drivers "given high unemployment and modest lending growth." For 2005, inflation is likely to breach the Bangko Sentral target of 4.0-5.0%.
In 2003, the Bank forecasted Philippine GDP growth rate at 4.0%, the same pace projected by Consensus Economics, which is also monitored by the Asian Development Bank.

The domestic economy, however, expanded at a faster than expected rate of 4.7%.

More Upbeat

In the Asian Development Bank's Asia Economic Monitor of December 2004, however, Consensus Economics offers a more upbeat outlook of the Philippine economy for 2004 and 2005 than the World Bank. The international pollster believes that Philippine GDP can grow at a rate of 5.9% in 2004 and 4.7% next year. Last July, Consensus Economics forecasted a lower growth pace of 4.8% and 4.3%, respectively.

Back up

A weakening economic growth is not only expected for the Philippines in 2005. Both the World Bank and Consensus Economics project a slowdown for East Asia in 2005. The World Bank projects East Asian economic growth to slacken to 5.9% from 7.1%. Consensus Economics expects GDP growth for the region to decelerate to 6.5% from 7.6%.