10 Nov 2021 – Economy grows at higher than expected pace in Q3

by Louise Maureen Simeon – The Philippine Star, 10 Nov 2021

MANILA, Philippines — The Philippine economy managed to weather the impact of the third round of pandemic lockdown, growing by a higher than expected pace in the third quarter and making the government optimistic about a better recovery for the rest of the year.

Data from the Philippine Statistics Authority (PSA) showed the economy, as measured by the gross domestic product (GDP), expanded by 7.1 percent in the July to September period, a turnaround from an 11.6 percent contraction in the same period last year.

The third quarter GDP was also stronger than expected as market expectations were significantly lower at 4.6 percent.

On a quarterly basis, GDP grew 3.8 percent despite the reimposition of the third round of the strictest lockdown in August due to the surge in COVID-19 cases following the spread of the more transmissible Delta variant.

Of the major sectors, services and industry managed to bounce back at 8.2 percent and 7.9 percent, respectively. Agriculture, which was last year’s saving grace, went into contraction mode at 1.7 percent due to livestock woes amid the African swine fever.

The services sector was driven by wholesale and retail trade, professional business services, and financial and insurance activities. Industry, on the other hand, was led by manufacturing and construction.

On the expenditure side, household consumption rebounded 7.1 percent, indicative of better consumer confidence, and is expected to be sustained as restrictions are further relaxed and vaccination coverage increases.

This also showed resilience in the face of higher inflation biting into the real incomes of households in the Philippines. Government spending likewise returned to expansion mode.

With the stronger than expected third quarter growth, Socioeconomic Planning Secretary Karl Chua said the government is on track to hit the upper end of the four to five percent target for 2021. Year-to-date growth currently stands at 4.9 percent.

“Our progress in the third quarter shows that recovery is accelerating and it is very likely that we will hit or even exceed the high end of our growth target for 2021,” Chua said.

Estimates from the PSA showed that fourth quarter GDP should grow 1.7 percent to hit the lower end and as much as 5.3 percent to reach the upper band of the target.

“So long as there is no unexpected new risk like a stronger variant or global surge then I think we are clearly on track for a strong recovery,” Chua said.

“We will hop through the holiday season with no surge if everyone cooperates and open the year with an even lower alert status,” he said.

While the economic team has been pushing for a lower alert level for the country, especially in Metro Manila, Chua maintained that the government does not want to rush into further easing again so as not to reverse and offset the gains.

In particular, daily cases have dropped significantly to less than 3,000 while mobility trackers are also on their highest levels since the pandemic.

Alex Holmes of Capital Economics maintained that GDP will likely jump again in the fourth quarter following a sharp drop in virus cases and the further easing of restrictions.

But, he said the strong expansion in the second semester will not be enough as recovery will still have a long way to go, and the economy will remain in catch-up mode throughout 2022.

“The largest risk to the outlook is that the virus situation deteriorates again. But while overall vaccine coverage is relatively low, most priority groups have been inoculated, diminishing the risk of further lockdowns,” Holmes said.

Worse, the economy remains weak considering that GDP is around six percent below its pre-crisis level and 15 percent behind its pre-crisis trend in the third quarter. Holmes said a large negative output gap will remain for a long time yet.

De La Salle University economics professor Maria Ella Oplas also said that the easing of alert level will lead to better growth but she warned of the possible consequences attached to it.

“You opened up the economy, but people are becoming lax. We might get another round of infections in another two weeks on the sudden downgrade to Alert Level 2 in many areas, including Metro Manila. If you look at the malls, even in October, it feels like Christmas rush,” Oplas said.

Ser Percival Peña-Reyes of the Ateneo Center for Economic Research and Development, for his part, said hitting government’s targets is feasible now that the economy is more open.

Peña-Reyes emphasized that the low point of COVID-19 cases coincided with the Christmas season where spending is at its highest coupled with higher vaccination rates.

“On whether people have the cash to spend, I think people have. For instance, migrant workers in economies recovering ahead of us will remit Christmas money for their families here. What we should worry about is vaccinating people in the regions, as travelers from Metro Manila may crowd tourist spots in December,” Peña-Reyes said.

“In the event that a resurgence happens, severe cases, hospitalization and deaths will be moderated. We don’t want another lockdown by the Christmas season,” he said.

However, Miguel Chanco of Pantheon Macroeconomics argued that the latest boost in consumption is not without cost to the longer-term recovery, as it was bolstered by a drawdown in savings, the rebuilding of which will continue to weigh on spending decisions going forward.

Chanco doubts that momentum will be sustained particularly with inflationary pressures still elevated, the job market continuing to languish, and with remittances providing little material support.

“History shows that government spending will soon take an enforced breather, with the 2022 election just six months away. Similarly, we reckon the incomplete recovery in investment will lose momentum until the political dust settles,” Chanco said.

On the other hand, assistant economist of Oxford Economics Makoto Tsuchiya underscored that recovery in the labor market should gain a firmer footing, and the resilient remittances should further fuel consumers’ spending power moving forward.

“On the external front, while we expect supply chain disruptions to linger well into 2022, we expect global trade to remain firm. We expect exports to gradually grow, although travel and tourism will continue to be a drag in the short term,” he said.

Even with the strong GDP performance for the quarter, Tsuchiya and Holmes maintained that the Bangko Sentral ng Pilipinas (BSP) will stay on hold next year to support the recovery and lessen any permanent economic scarring.

This is despite inflation set to remain elevated for now, especially with the continued pick up in global commodity prices and supply disruptions.

Nonetheless, Tsuchiya does not see this leading to any substantial second round effects, such as higher wages, given the ongoing slack in the labor market and the large negative output gap.

The BSP, for its part, said in a statement that it will continue to be patient with its accommodative monetary policy stance to support the full recovery of the economy. – Elijah Rosales, Lawrence Agcaoili