Philippines: Growth sinks to over four-year low in Q2
August 8, 2019
The economy cooled again in the second quarter on a weaker domestic economy as the external sector’s contribution to growth buoyed the headline print. GDP expanded 5.5% in Q2, down from the 5.6% expansion registered in Q1 and marking the weakest acceleration since Q1 2015. Second quarter growth also slightly underwhelmed market expectations of another 5.6% expansion. On a seasonally adjusted quarter-on-quarter basis, the economy expanded 1.4% in Q2, accelerating from Q1’s downwardly revised 0.6% print (previously reported: +1.0% quarter-on-quarter).
The continuation of the slowdown in Q2 came against notably softer domestic demand. Fixed investment fell 4.8% in annual terms in Q2 (Q1: +6.4% year-on-year), marking the worst performance in eight years and hampered by a sharp decline in durable equipment investment and a slowdown in construction investment. Government consumption slowed to 6.9% in Q3 from 7.4% in Q1, as the prolonged budget impasse continued to erode public spending in H1. Likewise, private consumption also eased in Q2 (Q2: +5.6% yoy; Q1: +6.1% yoy), despite decelerating inflation and sustained remittances inflows, while inventories subtracted 0.3 percentage points from growth in the quarter.
Turning to the external sector, exports of goods and services grew 4.4% year-on-year in Q2, down from the 5.8% expansion logged in Q1. Weakening export growth came amid the global tech downturn and ongoing U.S.-China trade tensions, which have weighed on exports of electronic parts. Import growth, meanwhile, was flat in Q2, moderating significantly from the 8.6% acceleration recorded in Q1 and representing a six-year low. Imports were likely also dented by delayed infrastructure spending from the budget deadlock as imports of goods dipped in the quarter. Overall, the external sector contributed 3.0 percentage points to headline GDP in Q2 (Q1: -1.1 percentage points).
Growth is expected to recover in the second half of the year as the government compensates for delayed spending by ramping up expenditures, which should in turn support investment. Meanwhile, the Central Bank’s monetary easing should eventually translate into lower borrowing costs. That said, an adverse external environment caused by the global trade slowdown and a feeble global tech sector is expected to continue to dampen demand for Filipino exports.
Commenting on Q2’s disappointing result and how this could affect their GDP forecasts, analysts at Nomura noted:
“We see some downside risks to our 2019 GDP growth forecast of 6.2%. Still, we remain optimistic of a strong rebound in H2 from H1’s 5.5% due to a swing to an expansionary macro policy mix, which we think should be most impactful in boosting investment spending. The government is implementing catch-up spending plans particularly on infrastructure projects, which will likely be intensified in the face of GDP growth remaining sub-par in Q2. We also do not expect the slowdown in private consumption growth to persist, given rising real disposable incomes, driven by the TRAIN tax reforms, lower inflation and low unemployment rates.”
Author: Lindsey Ice, Economist