Why the slowing GDP growth 

By: Fernando Fajardo August 14,2019 - 07:42 AM

The country’s Gross Domestic Product (GDP) grew by 5.5 percent in the second quarter of 2019, down from 6.5 percent in the same quarter of the previous year or from 5.6 percent in the first quarter of the year. To be able to grow by at least 6.0 percent for the whole year of 2019, the government must endeavor to grow the economy by 6.5 percent in the second half of the year.

As in the first quarter, the government is quick to point out the delay in the approval of the 2019 national government budget for the slower growth in the second quarter. Indeed, it was true but only in part. The other reason really is that the trend seems to be downward already since last year when economic growth slowed down to 6.2 percent from 6.7 in 2017 for reasons not related to the delay in the approval of the budget.

One cause to the slower growth last year was the dampening effect on consumption of the Train Law’s new or additional excise taxes on a number of products that took effect last year. It caused the prices of these affected products to rise, which, together with the insufficient supply of rice and the rise in the global price of oil, led to last year’s higher inflation. Higher inflation or higher prices would naturally bear down on consumption. Added to that was the increased in interest rate engineered by the BSP that further discourage both investment and consumption demand.

The fact is that inflation and interest rate is lower now, which together with the reduction in the reserved requirements of banks should have further boasted investment and consumption. Yet GDP growth continues to decelerate in the first half of the year.

On the demand or expenditure side of the economy, the household final consumption expenditure grew by 5.6 percent in the second quarter of 2019. This was slower than the 6.0 percent growth in the same period of 2018. Capital formation or investments, on the other hand went down by 8.5 percent, which more that reversed its 20 percent growth in the same quarter last year.

Finally, Government Final Consumption Expenditure (GFCE) grew by 6.9 percent in the second quarter of 2019 compared with its 11.9 percent growth in the same period of last year.

Capital Formation on Construction grew by 2.6 percent in the second quarter of 2019, slower than the 11.9 percent growth recorded in the same quarter last year. Private Construction, which accounted for 71.1 percent of total construction investments, grew by 23.1 percent while Public Construction contracted by 27.2 percent.

Capital Formation on Durable Equipment is mainly done by the private sector. This declined by 13.0 percent in the second quarter of 2019 compared to 27.5 percent growth in the second quarter of last year.

The combined export and imports of the country accounts for about 60 percent of the GDP. Total exports in the second quarter of the year grew only by 4.4 percent, down from 14.7 percent in the same quarter of last year. On the other hand, imports registered zero growth in the second quarter, down from 21.4 percent in the same quarter last year.

We can see therefore that from the demand side the lower growth rate in the second quarter was due largely to lower growth rates in consumption, capital formation, and exports and not so much due to lower government expenditures.

On the supply side, among the major economic sectors, Services had the fastest growth with 7.1 percent in the second quarter, up from 6.7 percent in the same quarter last year. Industry only registered a growth of 3.7 percent, down from 6.5 percent in the same quarter last year. Agriculture, Hunting, Forestry and Fishing had a growth of 0.6 percent, which actually was an improvement over the 0.3 percent growth in had in the same quarter last year.

From the supply side or production side, we see then that the reason for the lower growth in the second quarter this year was the failure of Industry to sustain or improve its performance in same quarter last year. That is more than covered, however, by the gains in the services service sector, which has almost twice that of industry in contribution to the GDP.

Net Primary Income (NPI) from the rest of the world and Gross National Income (GNI) grew by 3.1 percent and 5.1 percent, respectively.

With the country’s projected population reaching 107.9 million in the second quarter of 2019, per capita GDP grew by 3.8 percent. Meanwhile, per capita GNI and per capita Household Final Consumption Expenditure (HFCE) posted corresponding growths of 3.5 percent and 3.9 percent.

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