Is 7.5% growth good?
The government reported that the country’s gross domestic product (GDP) grew by 7.5 percent in real terms (after discounting for inflation) in the second quarter. This is higher than the 6.3 percent growth recorded in the same quarter last year. In the first quarter, the domestic economy grew by 7.8 percent. This puts the growth in the first half of the year at 7.6 percent which was higher by 1.2 percentage points than the 6.4 percent growth recorded in the same semester last year.
The government report says that it is now the fourth consecutive quarter that the economy has grown by more than 7 percent.
On the supply side, the industry sector grew the fastest at 10.3 percent in the second quarter. Services also grew by a good 7.4 percent but the agriculture, hunting, forestry and fishery sector went down by 0.3 percent. Note, however, that because services now account for over half of the GDP, its 7.4 percent growth impacts more on the economy than the 10.3 percent growth of industry.
Within the industry sector, construction activities led with 17.4 percent growth, followed by manufacturing with 10.3 percent and electricity, gas and water with 5.5 percent. Mining and quarrying went down by 2.7 percent. Within the services sector, the fastest growing were financial intermediation, with 12.4 percent, real estate, renting and business activity, 11.9 percent, and trade and repair of motor vehicles and motorcycles and related personal and household goods, 10.6 percent. Transportation, storage and communication grew only by 4.2 percent.
On the demand side, the impetus for growth came from government final consumption expenditures which grew by 17.0 percent, followed by capital formation or investments, 13.2 percent, and household final consumption expenditures, 6.2 percent. However, because we consume more than 70 percent of our GDP, the 6.2-percent growth in household consumption also impacts more on the economy than the 17.0-percent growth of government consumption expenditures.
Export of goods and services went down by 6.5 percent but this was cushioned by the 3.0-percent fall in imports. A decline in exports will impact on the gross domestic product negatively while a decline in imports does the opposite.
The 7.6 percent second quarter GDP growth may seem very satisfying given that GDP growth in the 10 years of the Arroyo government averaged less than 5 percent a year only. It remains to be seen, however, if this new and higher growth path under Aquino is sustainable.
As in the time of Arroyo, current GDP growth is still fueled largely by private consumption expenditures on the demand side and the expansion of services on the supply side. If the Philippines were a developed economy, this would not be much of a problem because high income economies can afford to go into high mass consumption of goods and services. This is not so for a poor or developing nation like ours. More consumption means less savings and savings are what we need to boost investments, especially when foreign direct investments from abroad are still reluctant to come. Without more investments, it is hard to see how we can achieve and sustain rapid GDP in the long run.
Likewise, in developing country like ours, the rapid growth of services is not necessarily good also if it means by-passing the industry sector. It is no longer a question that many countries achieved rapid improvement in the welfare of their people by moving first from agriculture to industry before going to services which pays more per worker. Short of that, we only go from low-productivity, low-paying agriculture activities in the rural areas into service activities, many of which are informal, in the urban areas that pay just a little more than agriculture and without much security of employment.
China, since the time it adopted the free market system to some degree in the late 1970s grew in average by 8 percent to 10 percent annually. Much of that was due to large investments made in industries that allowed the country to mobilize on a large scale their almost unlimited supply of surplus labor from the rural areas. But then China’s investments, although helped by foreign direct investments, was also due to the ability of its people to save a big chunk of their income. They consume only up to half of their GDP. Exports, of course, helped a lot to allow the Chinese economy to grow fast but to export more also means investing more in export industries.
On account of the 2008 to 2009 Great Recession that the world still fails to fully recover from, China’s exports and GDP growth is also slowing. The plan now is to boost domestic demand by way of more private and public consumption expenditures. At this time, however, when their income is already many times higher than they were in the 1970s, they can easily afford to do it if they really want it.
From a very low level compared to what we had in the 1970s, China’s per capita income equaled ours by the turn of the new millennium. Now it is already more than twice ours. Multiply China’s current per capita GDP with its 1.2 billion living people and you will get the second biggest GDP in the world next only to the U.S.
Here in the Philippines, we consume much of what we produce today and this boosts our GDP for the time being. But GDP growth cannot be sustained for long through this process because by consuming more we also limit our savings which in turn limit our capability to invest and produce more in the long run.
