Philippines: Growth cools to four-year low in Q1 largely due to budget delay
May 9, 2019
The economy slowed notably in the first quarter of this year. GDP expanded 5.6% in Q1, down from the 6.3% growth logged in Q4 2018 and marking the weakest print since Q1 2015. The Q1 print also underwhelmed market expectations of a softer deceleration to 6.1%. On a seasonally adjusted quarter-on-quarter basis, the economy expanded 1.0% in Q1, slowing from Q4’s revised 1.8% print (previously reported: +1.6% quarter-on-quarter).
The slowdown in Q1 came amid the prolonged budget impasse, which had resulted in a reenacted 2018 budget and delayed infrastructure projects. Government spending slowed significantly in the quarter, moderating from Q4’s 12.6% year-on-year expansion to 7.4% in Q1. Moreover, fixed investment also cooled in Q1 (Q1: +5.7% year-on-year; Q4: +8.5% yoy), chiefly due to a sharp slowdown in construction investment, whereas durable equipment investment picked up from Q4’s meager print. On a more positive note, household spending gained traction in the quarter, likely supported by more subdued inflation and sustained remittances inflows (Q1: +6.3% yoy; Q4: +5.3% yoy), while the replenishing of inventories contributed 0.4 percentage points to growth in the quarter.
Turning to the external sector, exports grew just 5.8% in annual terms in Q1, down significantly from the 14.4% expansion registered in Q4. Weakening export growth came amid the global tech downturn, which has weighed on the all-important exports of electronic parts. Import growth also eased notably in Q1, likely also affected by delayed infrastructure spending from the budget deadlock and a ban on new public works ahead of the midterm elections in May (Q1: +8.3% yoy; +12.4% yoy). Overall, the external sector detracted 0.8 percentage points from the headline GDP print in Q1 (Q4: +2.7 percentage points).
Growth is expected to recover in Q2, likely on a rebound in government spending and sustained private consumption, while the BSP’s partial unwinding of last year’s monetary tightening should also eventually feed through to lower borrowing costs. However, a more challenging external backdrop owing to the prolonged U.S.-China trade dispute, a weaker Chinese economy and sluggish tech demand will likely continue to hamper demand for Filipino exports.
Analysts at Nomura remain optimistic about the outlook for the Filipino economy, however, noting:
“We remain constructive on the growth outlook, and stick to the narrative that, along with Indonesia (among ASEAN countries), the Philippines will remain resilient to weaker global growth as domestic demand will strengthen […] we view the slowdown in Q1 GDP growth as temporary and mainly due to public sector spending because the approval of the budget was delayed. This has now been fixed with President Duterte having signed the budget in mid-April but also, in our view, the government is acting on catch-up spending plans, which will likely be further motivated by the disappointing Q1 GDP growth outturn. This should mean strong “payback” effects from Q2 onwards on overall fiscal spending. We believe infrastructure implementation remains the government’s top priority and we expect this to gain more traction this year.”
Author: Lindsey Ice, Economist