Philippines: Economy enters recession in Q2 for first time in almost three decades
Economic activity plunged in the second quarter as a result of the lockdown measures implemented in March to contain the spread of Covid-19. GDP dropped 16.5% in Q2 in year-on-year terms, following the 0.7% contraction in Q1. Q2’s reading is the lowest since records began in 1981, and is far worse than the 9.0% contraction that market analysts had expected. In quarter-on-quarter seasonally-adjusted terms, the economy dived 15.2% in Q2, following the 5.7% drop in Q1. These figures signal the first technical recession experienced in the country in almost two decades.
Domestic demand suffered a hard hit in Q2. Fixed investment plummeted a record 37.8% on an annual basis in Q2 (Q1: -4.4% yoy), on a sharp drop in manufacturing and construction investment, likely due to the effect of the strict lockdown measures on supply chains and business confidence. Private consumption also floundered, contracting a record 15.5% in Q2 (Q1: +0.2% yoy), as consumers halted spending amid one of the most restrictive lockdowns in the world, and unemployment rose. On a brighter note, public consumption accelerated, growing 22.1% in Q2, following Q1’s 7.0% increase.
Turning to the external sector, exports of goods and services dropped 37.0% in Q2, the steepest decline in over two decades, the impact of the pandemic on global trade and tourism (Q1: -4.4% yoy). Imports of goods and services, meanwhile, dropped an even sharper 40.0%, which is also the lowest rate seen in decades, due to the pullback in household spending and investment.
Looking ahead, GDP is seen contracting again in Q3 after Q2’s meltdown. Depressed domestic demand amid a high unemployment rate and downbeat confidence is seen weighing on economic activity in the coming months. Fiscal stimulus will be key for recovery, since real policy rates are already in negative territory, and some analysts speculate that there might not be much more room for monetary stimulus.
Reflecting on the effects that the pandemic will have on the economic outlook, Nicholas Mapa, senior economist at ING, noted:
“Government spending rose 22.1% and will be counted on to offset the steep decline in economic activity over the next few quarters. Finance Secretary Dominguez has placed his bet on infrastructure via the flagship Build-Build-Build programme, which could help revive construction activity to some extent. However, given that household spending is expected to be sidelined for the foreseeable future due to a fractured labour market and a downturn in remittances, the Philippine economy is likely headed for a base effect-induced bounce in 2021 and a return to the lower 3.5-4.5% growth trajectory of yesteryear by 2022.”