Mid-Year Economic Review:
Modest Recovery
Economic growth accelerates in the first half, but high fuel costs constrain spending
By Michael B. Mundo
First-Quarter Performance
The economy expanded 5.5% in the first quarter of 2006, faster than the 4.2% growth a year ago. Credit this year’s better record to the recovery of the agriculture, fishery, and forestry sector (which accounts for 20% of the GDP) to a 3.8% growth from last year’s 0.5% slump. Growth in industry (32% of GDP) stepped up to 5.5% from 3.4%, notwithstanding a hike in the corporate income tax rate in the last quarter of 2005 and a hike in the reformed value-added tax rate in the first quarter of 2006. Due to high fuel prices, growth in services (48% of GDP) weakened to 6.2% from 7.0% a year ago. The robust showing of business process outsourcing activities and hefty tourist arrivals (rising 10.4% in the first half to 1.42 million visitors) failed to prop up the services sector in the first quarter.
GNP growth also accelerated to 5.8% in the first quarter, versus 4.9% a year ago, despite a slowdown in growth of net income from abroad to 8.8% from 12.9%.
Compared to other countries, the first-quarter Philippine economic growth of 5.5% was faster than Malaysia’s 5.3% growth, Taiwan’s 4.9%, and Indonesia’s 4.6%. On the other hand, the country trailed behind Singapore’s 10.6%, China’s 10.2%, India’s 9.3%, Hong Kong’s 8.2%, South Korea’s 6.2%, and Thailand’s 6.0%.
On the demand side, consumer spending (77% of GDP) rose slightly to 5.1% in the first quarter from 5.0% despite high fuel prices and the higher RVAT rate. Higher farm incomes and remittances from abroad could have contributed to this. While consumption slowed down for tobacco, clothing and footwear, household furnishings, and transportation and communications, growth in the consumption of food and beverages, utilities, household operations, and miscellaneous items accelerated.
Public spending, even under a re-enacted national budget, went up 9.4% from 2.2% as the government shifted strategy to pump priming rather than imposing stricter fiscal discipline. Capital formation continued to shrink, but at a slower rate of 2.7% from 8.9%. Overall domestic demand growth accelerated to 3.8% from 1.8%.
Despite an appreciating peso-dollar exchange rate, exports of goods and income from services grew 12.2%, up from 1.8% a year ago. On the other hand, imports of goods and payments for services expanded 0.6%, bouncing back from a 2.2% contraction a year ago. Net external demand growth, therefore, slid to minus 62.0% from minus 17.7%.
Money and Prices
For the first half of 2006, inflation moved at a slower pace of 7.1% from 8.3% a year ago, notwithstanding the ongoing series of fuel price hikes. Accounting for the bulk of the consumer price basket, food, beverage, and tobacco prices likewise decelerated to 6.0% from 7.1%.
On the other hand, domestic liquidity grew 13.4%, higher than the 12.8% growth posted a year ago. Commercial bank loans as of end-June reached a 27-month low, shrinking 0.6%. The nonperforming loans ratio diminished to 7.2% on the back of a new law amending the Special Purpose Vehicles Act. Monetary authorities continued to keep the Bangko Sentral’s key interest rates stable amidst weak demand for loans and a downward trend on consumer inflation for the rest of the year.
On the fiscal side, the 91-day Treasury bill rate posted a weighted average of 5.314% in the January–June period, lower than the 6.543% weighted average a year ago. This decline in domestic interest rates reflected the narrower fiscal deficit of P31.5 billion in the first six months compared to the P67.8 billion shortfall a year ago. While overall revenues rose 21.1% to P471.1 billion from P389.0 billion, public spending increased by only 10.1% to P502.6 billion from P456.5 billion. As of end-March, the outstanding foreign debt of both the public and private sectors was at US$55.3 billion, the same level from a year ago.
Behind a slower inflation rate is the continued strength of the exchange rate. The peso-dollar reference rate appreciated 5.1% to P52.05/US$ in the first semester from P54.84/US$ a year ago. The stronger peso was boosted by record-high gross international reserves, reaching US$21.2 billion, equivalent to 4.3 months’ worth of imports of goods and payments of services and income. At the same time, the balance of payments surplus widened by 3% to US$2.04 billion from US$1.98 billion. The current account surplus, as of the first three months, also broadened by 59% to US$1.2 billion from US$733 million.
In the January–May period, on the other hand, exports surprisingly grew broad-based at 16% to US$18.7 billion, while imports expanded 8% to US$20.0 billion, partly due to rising fuel costs.
OFW remittances increased 15% to US$6.0 billion in January to June from US$5.2 billion a year ago. Meanwhile, net foreign portfolio investments in the first six months actually decreased 60% to US$774 million from US$1.9 billion a year ago. Nevertheless, the composite PSEi (Philippine Stock Exchange Index) advanced 13.2% to 2,178.79 index points at end-June from 1,924.23 a year ago.
Investments and Employments
In the first half, investments approved by the Board of Investments, the Philippine Economic Zone Authority, and the Clark Development Corporation decreased to P104.5 billion from P126.0 billion a year ago.
Lower investment levels could spell fewer jobs for the economy. In the first two quarters, the ranks of the unemployed swelled 7.2% to an average of 2.9 million. The figure was 2.7 million a year ago. This translated to an unemployment rate of 8.2% this year from 7.8% a year ago. On the other hand, the employed labor force grew only 2.4% to 32.7 million from 31.9 million.
Those employed in services expanded 2.4% to 16.0 million from 15.6 million. Agriculture’s workforce increased 2.0% to 11.4 million from 11.2 million. However, industry’s workforce dipped 0.9% to 5.06 million from 5.11 million.
Manufacturing and Consumer Spending
The shrinking industry workforce is not surprising given that the manufacturing volume of production actually contracted 8.9% in the first five months compared to a growth of 1.9% a year ago. Food manufacturing, beverage, footwear and wearing apparel, wood and wood products, furniture and fixtures, paper and paper products, publishing and printing, rubber products, chemical products, nonmetallic mineral products, glass and glass products, cement, electrical machinery, and transport equipment all posted losses during the period, notwithstanding a broad-based upsurge in exports.
Furthermore, the manufacturing sales volume has continued to shrink this year. In the first five months, appliance sales diminished by 20% to 1.98 million units from 2.46 million units. Partly due to the hike in the RVAT rate, car sales also dipped 3% to 46,233 units in the first half from 47,670 a year ago.
Despite lower inflation, rising fuel costs and the higher RVAT eroded retail sales in the first half. Share prices of consumer-driven companies San Miguel, SM Prime, and Jollibee were down by a market cap weighted average of 12% in the first six months. Even the consumer outlook surveys of the Bangko Sentral in the first and second quarters indicated a decline (although there are signs of a recovery) in overall consumer expectations based on family financial situations, level of family income, and economic condition of the country.
Second-Quarter Outlooks
According to the National Statistical Coordination Board, deseasonalized GDP grew only 0.9% quarter-on-quarter in the first quarter—the slowest pace since the last quarter of 2004. Based on the agency’s index of leading economic indicators, nonagricultural activities slowed down to 0.060 in the second quarter compared to 0.078 in the first quarter. Furthermore, year-on-year GDP growth in the second quarter could be slower than the 5.5% preliminary performance posted in the first quarter, which is still subject to revisions. On the other hand, the Bureau of Agricultural Statistics reported better-than-expected growth in agriculture of 5.1% in the first semester. Agriculture’s performance could have offset the expected weak showing of industry and services in the first semester.
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