Sustained growth in the second quarter

The Philippine economy grew by 5.9 percent in the second quarter of this year, up from 3.4 percent recorded in the same quarter last year. With the recorded 6.4 percent growth in the first quarter, overall growth in the first half of the year was a respectable 6.1 percent. With these, it is more likely now that the Philippine government will hit its growth target at between 5 and 6 percent for the whole year, a target which is higher than the projected growth of between 4 to 5 percent made by many close observers of the Philippine economy, like the World Bank, International Monetary Fund, Asian Development Bank and private think-tanks.

The low figures the nongovernment sector placed on the prospects of the Philippines economy this year were understandable. Global economic recovery from the last Great Recession was timid. Up to last year, for example, the United States, the largest economy in the world, was unable to grow faster than was needed to put many of its affected workers back to work while the European Union barely made any progress on account of the fiscal problems faced by many of its member countries.

In the second quarter, Philippine economic growth was reported to be higher than the Southeast Asian Nations’ average of 4.7 percent. In particular, Malaysia grew only by 5.4 percent, Thailand, 4.2 percent, Vietnam, 4.4 percent, and Singapore, 2 percent. In Asia, only China and Indonesia surpassed Philippine growth in the second quarter, with the former, the second largest economy in the world, growing at 7 percent and the latter, an oil-rich country, growing at 6.4 percent.

The Philippines’ current performance looks surprising given that in the past, its annual growth was anemic when compared with that of many of its close neighbors in Asia. Last year, for example, the Philippine economy grew only by 3.9 percent which was much lower than Malaysia’s 5.1 percent, Indonesia’s 6.5 percent, Singapore’s 5.1 percent, Vietnam’s 5.9 percent, China’s 9.5 percent and India’s 7.3 percent. Thailand did not grow at all but that was because of the floods that inundated many of its factories for months.

What made the Philippines tick this time? Was it pure luck or the genius of the Philippine economic team? Or is there something new that is going on the country that made it perform better this time?

Let us look what happened in the first two quarters of the year.

In the first quarter, despite agriculture growing only by 1 percent, the economy grew by 6.4 percent, due to the 8.5-percent growth in the service sector and 4.9-percent growth in the industry sector. All the major groups of activities in the service sector grew by around 8 percent or more while in industry the manufacturing group and utilities group (electricity, gas and water supply) were leading.

That is from the production side. On the demand side, the impetus for growth in the first quarter came from the surge in government and household final consumption expenditures. Capital formation or investment did not do well in the first quarter but export did, especially the export of services coming from the booming business process outsourcing activities in the country, including tourism.

In the second quarter, the service sector again led with 7.6 percent growth in the production side, along with the 4.9-percent growth in industry. On the demand side, growth was led again by government and household consumption expenditures.

As a whole, capital formation or investment did not do well again in the second quarter but this time fixed capital formation which includes construction and durable equipment did well. Under capital formation, however, the change in inventories was on the negative side. This implied that a good part of what was disposed in the second quarter where taken not from current output but from inventories that piled up in the past. Last year for example total inventories of unsold stocks rose by 11.8 percent.

When inventories are piling up, it means that part of what were produced during the year or quarter are not sold. In the estimation of the GDP, any unsold output is considered bought by the producers themselves which they add up to their inventories.

With the US still haunted by sluggish growth and high unemployment rates and the Euro zone’s fiscal problem also continuing, it is not certain how the Philippine economy will perform in the second half of the year. But if the first half of the year were any indication, the Philippine economy might still perform much better than its close neighbors and the rest of the world in the second half will. Meaning the Philippine government will meet its growth target for the year of between 5 percent and 6 percent, if not higher. Note that despite the sluggish growth of the global economy, Philippine exports managed to grow in real terms by 7.9 percent in the first quarter and 8.3 percent in the second quarter.

The question though is whether or not what drives the economy now—more growth in services from the production side and consumption from the demand side is the best option the country can follow to achieve faster and sustained growth that is inclusive enough to wipe out much of our poverty. In the short run, it may be, but in the long run it may not be.