Unexpected 7.1% GDP growth

The World Bank (WB), International Monetary Fund (IMF), Asian Development Bank and most private think thanks in and outside the country projected the Philippine economy to grow between 4 percent and 5 percent this year. Coming from a disappointing 3.9-percent growth last year, the Philippine economic team believed it could do better this year. It set the Philippine gross domestic product (GDP) growth for the year at between 5 percent and 6 percent.

That really was very ambitious given that the global economy was also not expected to do better this year than last. From 4.2 percent, the WB, for example, projected the global economy to grow only by 2.8 percent this year on account of the continuing inability of the US economy to grow faster than needed to bring down its unemployment rate which shot up with the coming of the last Global Recession and the growing pains from fiscal excesses in the Euro economies that were also expected to put them back into a recession this year.

Surprisingly, the Philippine economic team seemed to be proven right when in the first and second quarter of the year the GDP grew by 6.4 percent and 6.0 percent (revised figure from the original released figure), respectively. Despite this, many still thought, including the WB and IMF, that the first half growth was not sustainable. Both recently made only a minor upward adjustment in the country’s GDP forecast. It turned out that the reported third quarter 7.1-percent GDP growth was even much faster than in the first half. So, unless something really bad comes our way in the last quarter of the year, the Philippines is now poised to overshoot the high end of its GDP growth target this year. That makes many of the forecasters wrong.

So much for forecasting.

As the literature goes, forecasting is not easy to do and that more often than not, a forecast is bound to be missed. The most common method of forecasting is based on past trends. Assuming the trend continues, then, the situation in the future is going to be this way, the forecaster would tell us. But we just do not allow things to continue as they were, especially if the past was a disappointing one like what we had last year. We could also do many things to alter the trend such as what we did in the first three quarters of the year.

In 2010, the global economy grew by 4.2 percent; the Philippines grew faster by 7.3 percent. In 2011, global economic growth was cut down by one third to 2.8 percent as the recovery lost steam but Philippine economic growth went down much faster by almost a half to 3.9 percent. That was very disappointing indeed and we blamed that mostly on the inability of the new Aquino government to utilize its approved budget on time due to its insistence on scrutinizing every item of expenditure to avoid waste and minimize corruption, especially with respect to the budget for infrastructure.

In real terms, government expenditure grew only by 1.0 percent in 2011. It is different this time. Having learned enough what to do to expedite the use of government funds without losing so much to corruption, the government finally increased its level of spending by 24 percent in the first quarter, 6.0 percent in the second quarter and by another 12 percent in the third quarter. This, together with the sustained increase in consumer demand and the surprisingly resilient export sector, was enough to make the Philippines the best performing economy in East Asia after China.

In the third quarter, another good development also came from the production side when agriculture finally grew by 4.1 percent. This was much higher than the 2.7 percent growth in 2011 and the less than 1 percent growth registered in the first half of the year by the sector. The industry sector grew by 8 percent in the third quarter while the service sector also sizzled with its 7.0 percent recorded growth.

However, it is not all good at all with respect to investment. In 2011, it grew in real terms by 8.1 percent. In the first quarter of this year, investment went down by more than 20 percent. It grew again by 7.3 percent in the second quarter but that was not enough to cover its losses in the first quarter. Investment growth in the third quarter was only minimal in real terms at 4.3 percent.

Basically therefore, Philippine economic growth is still driven by consumption on the demand side and by services on the production side. The two are not quality sources of growth, however. On the demand side, what we need today are more investments, not more consumption in order to make us more productive in the years to come. On the production side, we still need to expand our manufacturing base to give more income to our workers, not services that pay very little. This we have to do if we were to wipe out much of our poverty.

There is also a problem with our government expenditures. Now the government is learning to spend on time but it is really not spending enough. With investment still very volatile and exports being threatened by the receding economies in the Euro area and the anemic growth in the U.S. and Japan, we still need the government to stimulate the economy. Here the government is not doing its job well as shown by the unnecessary cutting down of the government deficit below target.

In short, we still have much to do. One year’s rapid growth is not enough to wipe out our poverty and make us part of the First World.