We can’t ignore a likely economic slowdown

ECONOMIC GROWTH in the first half of 2014 is slowing rather than picking up.

The unusually strong growth of 7.2% in 2013, an election year, is unlikely to be replicated in 2014 and 2015. The last four “peaks” (2004, 2007, 2010 and 2013) occurred during election years. The emerging consensus is that growth in 2014 would be in the neighborhood of 6%, much lower than the official growth target of 6.5% to 7.5%.

Unless there are drastic improvements in Mr. Aquino’s ability to mobilize and complete public infrastructure projects and unless the new vigor of the manufacturing industry is sustained, GDP growth in 2014 to 2015 would hit, at best, 6%.

Given the worsening constraints to economic growth — the deteriorating public infrastructure, worsening geopolitical situations (wars in Ukraine and the Middle East and their impact on global growth), the impending power crisis, and the uncompetitive local economic environment — the official growth targets of 6.5% to 7.5% in 2014 and 7% to 8% in 2015 do not appear attainable.

I forecast that a full-year GDP growth of 5.9% in 2014 and 6.1% in 2015.

Agriculture and manufacturing are the major contributors to second-quarter growth. In the last four years, agriculture grew, on average, by 1.5%. It expanded by 3.6% in 2014 but it was largely base effect, coming from a negative 0.2% in the second quarter of 2013. With the looming El Niño phenomenon in the second half of 2014 and first quarter of 2015, the strong growth in the second quarter of 2014 cannot be sustained.

Manufacturing was a strong source of growth in 2013. After slowing down in the first quarter of 2014, it rebounded in the second quarter of the year. Its sustainability would depend on two conditions: first, reliable and sufficient power supply; and second, strong demand from the country’s top trading partners (Japan, China, the United States and Europe). Both are unlikely to be satisfied. I would give the sector an even chance of sustaining growth this year and next.

The construction sector has slowed down sharply. Private construction, which accounts for three-fourths of the construction industry, fell 6% in the first quarter of 2014. Public construction plummeted 12.9% in the second quarter of 2014, after a strong growth of 31.1% in the same quarter last year.

The financial sector has shown signs of fatigue. After a strong 12.6% growth in 2013, its performance in the first and second quarter of 2014 has gone down sharply. In the first quarter of 2014, the sector grew 5.7%, down from 18% in the same period in 2013; in the second quarter, it expanded 5.9%, down from 10.3% in the same period in 2013.

On the expenditure side, government final consumption expenditure (GFCE) has stagnated after a strong growth in 2012 and 2013, when it expanded 15.5% and 7.7% respectively. In the first half of 2014, GFCE was practically flat. It inched up by 1.9% in the first quarter of 2014, but sharply down from 10% growth in the first quarter of the year before. In the second quarter, government consumption was unchanged (zero growth), starkly down from the 12.1% growth in the second quarter of 2013.

The sharp contraction of gross domestic capital formation (GDCF) in the first half of 2014 is alarming. In the first quarter of 2014, GDCF slowed to 9.5% growth from 49.8% growth the year before. In the second quarter of 2014, GDCF plunged into negative territory, contracting by 2.4%, down from a whopping expansion of 33.6% the year before.

The external sector remains to be a weak and unreliable source of growth. Exports of goods continue to underperform. Growth in the first and second quarters is largely due to base effects. In the first quarter of 2014, exports grew 14.2% after a contraction of 10.6% in the same period in 2013. In the second quarter of 2014, exports expanded 10.3%, after a contraction of 7.7% in the period in 2014.

Comparing the first semester GDP growth of 6% with the full-year 7.2% growth of 2013 suggests an economy that is losing steam.

But is the Aquino III administration prepared for an economic slowdown? Does Mr. Aquino and his men have an economic recovery plan?

Understandably, their first instinct is to put a positive spin to the seemingly slowing growth numbers. They opted to compare the second-quarter growth of 6.4% with the first-quarter GDP growth of 5.6% (downgraded from 5.7%), and concluded that the economy is doing fine. There is no need to change the GDP growth target of 6.5% to 7.5%. This spin, sadly, is too rosy.

This positive spin ignores the downside risks to economic growth. It ignores the El Niño phenomenon that might reduce agricultural output that would then result in higher food prices. El Niño might also exacerbate the short supply of hydro energy.

It fails to consider the negative effects of the looming power crisis. It ignores the economic costs of the worsening traffic and the growing unreliability of mass transit systems in Metro Manila.

The positive spin ignores the slow implementation of the public infrastructure program, including the rehabilitation projects for the calamity areas (Leyte, Bohol, Zamboanga and others). It ignores the rising costs of utilities (electricity, gas and water) that could crowd out spending for food and its implications on poverty and hunger. And it ignores the dampening effect of the hostilities in the Middle East on the deployment of overseas Filipino workers. –Benjamin E. Diokno, Businessworld