Sustaining Q1 GDP growth

After four quarters of lackluster performance, the Philippine economy is off to a rousing surge. The gross domestic product (GDP) grew by 6.4 percent in the first quarter of 2012 compared to an upwardly revised growth of 4.9-percent last year. This is the surprising opening statement of the government report on the first quarter performance of the economy released at the end of May.

Surprising because the World Bank forecast the Philippines to grow by only 4.2 percent this year, a figure which is also close to the forecast made by other multi-lateral bodies like the United Nations, International Monetary Fund and Asian Development Bank. Even the Philippine economic team, which usually is more optimistic than anyone else, set the GDP growth target for the year only at 5 percent to 6 percent.

More surprising though is that in Q1 the Philippines was surpassed only by China in Asia which made many business people ask if this is sustainable growth for the rest of the year.

Considering the last decade where the Philippine economy grew on average by less than 5 percent annually and the fact that the United States, Europe or developed economies as a whole are troubled by their inability to resume normal growth after the last Great Recession, the question is not easy to answer.

My view is that the Philippine’s Q1 faster- than-usual growth is sustainable only if we rely less on the same sources of growth in the first quarter and do more in some sectors of the economy which are more essential for long term growth and which suffered in the first quarter.

Let us first trace the sources of growth in the past and why they may not do well in the rest of the year.

On the supply side, growth was drawn mainly from the revitalized services sector, particularly trade and other Services. It also got a big boost from manufacturing which has recovered ground that was eroded during the third and fourth quarters last year. On the demand side, growth came mainly from net exports and robust households spending.

Why is the high GDP growth not sustainable the rest of the year if we rely on the same sources of growth we had in Q1?

One obvious reason is that Philippine exports are still threatened by the sluggish growth in the U.S. and Europe’s teetering towards another recession. The two advanced economies account for much of our exports, including Japan, which is not doing well up to this time. China is also slowing down. That could provide another reason for our export to slow down. When global growth is suspect, there can be no way also for foreign direct investments to go but down.

Given that much of our exports are from manufactured items like electronics and related products, slower export growth also means slower growth in manufacturing.

In the past, the services sector on the supply side and household consumption on the demand side, provided much of the impetus for the country’s growth. This may continue this year but it may be derailed also by the slack in the rest of the economy.

Relying on the services sector and household consumption is not necessarily a healthy proposition in the long run. This is because on one hand, unlike manufacturing, for example, the services sector generally demands only low skilled workers and pays less for them than the industry sector. This is not good enough as a vehicle to wipe out poverty.

On the other hand, higher consumption rates means lower savings and investment rates which will also compromise our capacity to increase our productive capacity in the long run.

Where shall we go to sustain rapid growth?

On the supply side, growth must be broad based to include agriculture, particularly in food crops, livestock and poultry and fishing to lower food prices and provide income to the people in the rural areas. Overall, agriculture growth in the first quarter was only one percent.

On the demand side, there must be more investments or capital formation, both private and government to increase the productive capacity of the nation. But for investments to come we must work hard to improve our global competitiveness.

The last ranking made by the Davos-based World Economic Forum put the Philippines at No. 75 out of 142 countries being ranked. WEF ranks countries according to their performance in 12 pillars of competiveness with the first four consisting of institutions, infrastructure, macroeconomic environment and basic education and health as the most basic to be addressed for any country to become competitive. It turns out that we placed only 100th among 142 countries in the composite index for basic requirements because we placed 117th only under institutions (mostly about governance) and 105th under infrastructure.

Well, we know already where are weak, which made us the laggard in Asia. Where some of neighbors in Asia are strong, that allowed them to become part of the First World. What we do not know is how to take the first few right steps.