GDP growth slowing down again

The latest economic report released by the government shows that the economy grew only by 3.4 percent in the second quarter of the year, down from 8.2 percent in the same period last year and from the 4.9 percent growth reported for the first quarter this year which was also down from 7.8 percent in the first quarter of last year. This looks ominous but to better understand why, let me give you first some ideas of the workings of the economy.

Demand creates its own supply, Keynesian economics says. It says that the total of what a country produces depends on the level of demand. This is true in the short run. In the long run, the country can produce only up to its full capacity as determined by the quantity and quality of its resources and level of technology. In the short run, an increase in demand will increase supply as long as it is allowed by existing unused capacity.

At the national level, aggregate demand consists of household final consumption expenditures, government final consumption expenditures, capital formation or investments, and net exports. The last is the difference between exports and imports, which could be positive or negative depending on which of the two is bigger or smaller than the other.

If the country’s total output of goods and services vary with demand then it is interesting to see which of the components of aggregate demand tends to vary greatly and for what causes in order to be prepared for them. Of the four components of aggregate demand, it is consumption that is more stable. Consumption depends on the level of income but a change in income tends to lead only to a less than proportionate change in consumption. Once accustomed to a certain pattern and level of consumption, we usually maintain that for a time. It could still increase or decrease for some reasons but the change will not be as wildly as the other three. The other three are more erratic depending on the objectives of the people deciding government policies in the case of government expenditures, the mode of the business sector in the case of investment, and the condition of the economy of our trading partners.

Let us see now what happened from the demand side.

Wanting to get a favorable result in the last election, the GMA government spent more than what was budgeted in the months prior to election. This together with the surge in investments and exports, which came in response to the expected recovery of the global economy from the last global financial crunch, allowed the country’s gross domestic product to expand to 7.8 percent and 8.2 percent in the first two quarters of last year, respectively.

With elections still three years away, and wanting to curve the ballooning budget deficit, the new administration that came in July immediately reversed gears. It cut total government expenditures by 7.9 percent and 7.6 percent, respectively, in the last two quarters of last year and by a whopping 17.2 percent in the first quarter of this year. It was good that investment growth which slowed from 21.9 percent in the first quarter to 10.8 in the first quarter of last year again turned upward by 12.4 percent and 22.8 percent in the third quarter and last quarter of last year, respectively, and also by a whopping 37 percent in the first quarter of this year. Exports which grew fast at 22.4 percent in the first quarter and 29.1 percent in the second quarter of last year continued to grow at 28.3 percent and 21.1 percent in the following two quarters although unlike investments, it grew only by 3.3 percent in the first quarter of this year.

So despite the drastic cut in government expenditures, the high level of investments and exports in the last two quarters of last year allowed the P-Noy economy to grow at 6.3 percent and 7.1 percent in the in last two quarter of last year and by 4.9 percent in the first quarter exports.

Learning its first lesson in fiscal policy or how a cut in government expenditures can also cut GDP growth, the new administration finally allowed government expenditures to grow by 4.5 percent in the second quarter. This time though, investments barely moved up by 0.9 percent while exports finally went down by 0.3 percent. Hence the dismaying 3.4 percent GDP growth overall that was announced last Wednesday for the second quarter.

The government, of course, says it differently: “While buffeted by headwinds from the European debt crisis and the fragile recovery of trading partners, the less than desirable growth benefited from the robust rebound of the agriculture sector, the sustained though slowing down performance of manufacturing and the balanced growth of the ever-resilient services sectors.”

This government statement is from the supply side. On the demand side, the government says that “growth came mainly from consumer spending as fixed capital formation particularly Construction has not really felt the promise of the Public and Private Partnership program, while external trade has been lackluster at best. With the seething political turmoil in the Middle East and North Africa plus the economic uncertainties in western countries, Net Primary Income (NPI) (previously called NFIA) declined by 2.8 percent retarding the Gross National Income (GNI) from 9.2 percent the previous year to 1.9 percent its lowest growth during the last four years.”

The GNI is the equivalent of the more popularly understood Gross National Product. We arrived at our GDP or GNI by adding to the GDP our net factor from abroad or net primary income.

Now you know why the economy is slowing down? Is that ominous?