Why the third-quarter economic slowdown?

There is more to be said about the disappointing growth of the economy in the third quarter of 2011. In the 2011 budget, President Benigno Aquino III’s economic team projected gross domestic product (GDP) growth of 5 percent to 6 percent. When the first half of the year cleared, the economy grew only by 4 percent. This prompted the economic team to lower its growth target to 4.5 percent to 5.5 percent. This means that to hit the midpoint target of 5 percent or higher, the economy must grow by at least 6 percent in the second half. Early this week, the government’s latest economic report showed that in the third quarter, the economy grew only by 3.2 percent. What gives?

The fact is that global economic growth has been on a downtrend since the start of the year. Given the openness of the Philippine economy or its interconnection with the rest of the world, there is no way the Philippines could avoid being dragged down. Having known that, the least the economic team could do is to prevent the slide in government expenditures, if not expand it to pump prime the economy. In these, the economic team did very little. Instead, it allowed government expenditures to lag behind its budget, particularly in the construction of new infrastructure that the country badly needs. When the government spends less than it is supposed to, we should expect it to drag the economy down.

Now it can also be told that, indeed, as a result of the global economic slowdown, our exports declined by 13.1 percent in the third quarter, down from 24 percent during the same period last year, while our imports managed to grow 0.2. A fall in export, without a corresponding fall in import, also results in lower GDP growth. In fact, had last year’s third-quarter exports been maintained in the same period this year, GDP growth in the third quarter would have been phenomenal at more than 10 percent as a result of the 7.1 percent, 9.4 percent and 24.5 percent growth, respectively, in household final consumption, government final consumption expenditures and capital formation.

In the third quarter, government final consumption expenditure rebounded by 9.4 percent, up from 6.5 percent in the third quarter of 2011. This was attributed by the government mainly to the increasing provision for the social protection programs such as Pantawid Pamilyang Pilipino Program (4-Ps) and pension program for indigent older persons. There is, however, another type of government expenditure that remained low. This was in the construction of new infrastructure that the P-Noy government made a lot of noise about since last year through its so-called public-private partnership. Until now, not one PPP project has taken off. This explains why construction activity dropped by 0.6 in the third quarter in contrast to the 17.1 percent growth it recorded in the same period last year. The government economic report said that construction was pulled down by the contraction in investment in both public construction, with its fifth consecutive quarter of reversals, with 21.3 percent from negative 23.4 percent and private construction, its first decline after six consecutive quarters of double-digit growth, with 7.8 percent from 35.7 percent.

Investments in durable equipment maintained its growth, the government economic report also said, albeit at a slower pace, at 9.9 percent from 17.6 percent a year ago. Increased investments were registered in 13 of 20 types of equipment. The government economic report noted increases in investments in air transport, 108.5 percent from a growth of 142.9 percent; other miscellaneous durable equipment, 20.4 percent from 17.0 percent; other special industrial machineries, 41.5 percent from 61.7 percent; telecommunications and sound recording/reproducing equipment, 18.4 percent from 9.7 percent; and other general industrial machineries, 21.7 percent from negative 3.2 percent.

Meanwhile, declines were noted in the following subsectors: water transport, 38.6 percent from 49.6 percent; road vehicles, 0.9 percent from a growth of 13.6 percent; pulp and paper machineries, 18.8 percent from 140.9 percent; aircon and refrigeration equipment, 3.0 percent from 19.7 percent; and mining and construction machineries, 3.3 percent from 30.4 percent. With the decreased investment in orchard development, capital formation for the combined breeding stocks and orchard development rebounded by a measly 0.2 percent from 0.3 percent.

One component classified under capital formation is the addition to the total inventory. For the third quarter of 2011, this amounted to P18,628 billion compared to the withdrawal of P39,042 billion in the previous year as most of its subsectors posted additions particularly in the inventories of trade and other establishments. Note that as business establishment is unable to sell part of what it produces, the consequent increase in its inventory is considered an investment in computing the GDP. But this should not fool us into believing that this is good because unsold stocks are never good for business.

What about the fourth quarter? What is the prospect? One member of the economic team said the increase in consumer expenditures because of the coming Christmas would help push growth in the last quarter. This is not going to be because we also had Christmas last year. What about P-Noy’s promised of spending more than P70 billion in stimulus funds? Well, the money may have been released already to the implementing government agencies, but if I know how government works, that does not mean that all of that will have been spent by the end of the year.