Where did the growth come from?

GOOD NEWS: THE ECONOMY APPEARED to show overall improvement in the second quarter, bucking recessionary trends worldwide. The second-quarter growth figures released last week indicate that we have managed to avert a recession, meaning, we were able to avoid having two quarters of successive contraction of the economy. The data show a rebound in the second quarter (2.4-percent GDP growth from Q1) after the first-quarter contraction (-2.1-percent growth from Q4 2008). The year-on-year growth rate (that is, comparing with the same quarter last year) was 1.5 percent.

One is naturally led to ask where this growth came from, as it would tell us how such growth must have impacted on the lives of common Filipinos. I, thus, examine the growth data more closely below.

Government-driven

Government spending clearly drove the economy’s growth in the second quarter, helped by a slight pickup in consumer spending which, nonetheless, remained sluggish.

Note that there are four sources of demand for the economy’s production of goods and services: Private consumption, government consumption, investments (by both government and private firms) and foreign demand for our exports. Investment spending continued to shrink (-9.8 percent). Exports fell even more steeply than before (-16 percent, a steeper drop than the previous quarters’ -11.5 and -14.7 percent). Private consumption grew a measly 2.2 percent, a far cry from the 4- to 6-percent growth it had been posting for many years. But government consumption spending grew by a brisk 9.1 percent which, even as it actually accounts for a mere 8 percent of GDP, helped offset the steep falls in investments and exports nonetheless.

Even more telling indication of the government’s hand in eking out the slight growth in the second quarter was how the nearly 30-percent growth in public construction managed to hold the contraction in investments to single-digit level. But investment in durable equipment had actually dropped by almost 19 percent. Private construction and agricultural investments also fell 6.5 and 4.9 percent, respectively.

In short, it was the government that primarily created the demand for goods and services that led to a still-positive overall growth rate in the economy.

Uneven growth

Let’s look at the supply side. Which production sectors were responsible for the economy’s growth?

The sectoral breakdown of the overall GDP growth tells us that there is really little to celebrate about in the slightly positive growth rate we attained. Agriculture (crops and livestock) actually shrank by 1.6 percent, and even modest growth in palay, bananas, livestock and poultry failed to lift the sector to positive growth. Fisheries grew 5.9 percent, but forestry fell 8.7 percent.

Manufacturing, which accounts for nearly two-thirds of the industry sector, was down 7.2 percent, with almost all manufacturing industries showing negative growth, most in the double digits. Not even the double-digit growth in mining and construction (which only account for 2 and 6 percent of GDP, respectively) helped avoid an overall negative performance for the industry sector.

The positive numbers came mainly from the services sector, led by retail trade and private services (where the informal economy is prominent) and real estate, which appears to have rebounded after two successive quarters of contraction. It is noteworthy that business services (which includes the otherwise booming business process outsourcing or BPO industry) hardly grew this time, with 0.7 percent.

Implications

What is all this telling us?

I have argued recently (“Needless debate on recession,” NFL 6-29-09) that whether the aggregate GDP growth is positive or negative at this time doesn’t matter as much as how the growth is felt by the majority of our people. The value of the positive aggregate number is mainly psychological. But a decline in agriculture is disturbing, as 70 percent of the Filipino poor are rural dwellers. A steep decline in manufacturing is equally disturbing, as it spells thousands of job losses for common workers. The positive growth in services largely traces to the Filipinos’ well-recognized ability to cope (thank God for that!), as growth seems most apparent in informal sector activities. The challenge remains for us to revive the mainstream economy, and it takes having more faith in ourselves and in our future to make this happen.

The other challenge is that the massive government spending that helped buy us some growth now will surely come back to us as a renewed heavy debt burden later. Our past experience has consistently shown how such debt overhang has gotten in the way of faster and broader-based economic growth and development. And this is a major challenge that the next president would have to be prepared to deal with. –Cielito Habito,Philippine Daily Inquirer

Comments welcome at chabito@ateneo.edu