THE economy in the first quarter contracted for the first time in more than 21 years, amid the combined impact of the Taal volcano eruption in January and the coronavirus disease 2019 (COVID-19) pandemic.
The Philippine Statistics Authority (PSA) yesterday reported in a video conference the country’s gross domestic product (GDP) declined by 0.2 percent in the first quarter of 2020.
This is the first contraction for the Philippine economy in 85 quarters, or since the fourth quarter of 1998, then with a decline of 0.3 percent.
Karl Kendrick Chua, National Economic and Development Authority acting socioeconomic secretary, also said in the same briefing this is the first time real GDP growth fell into negative territory since 1998, during the combined El Niño and Asian financial crisis.
“Our country has faced significant socio-economic risks and shocks during the first quarter of 2020, all totally unexpected: the Taal volcano eruption in January; a significant decline in tourism and trade starting in February due to the COVID-19 pandemic; and the need to implement the enhanced community quarantine (ECQ) in Luzon and other parts of the country starting March,” Chua said.
“Containing the spread of the virus and saving hundreds of thousands of lives through the imposition of the ECQ has come at great cost to the Philippine economy. Our economic growth is showing weaker performance compared to the past two decades. Even so, our priorities are clear: to protect lives and health of our people,” he added.
Key factors
The PSA said main contributors to the decline were manufacturing; transportation and storage; and accommodation and food service activities.
Among the major economic sectors, agriculture, forestry and fishing as well as industry contracted by 0.4 percent and 3 percent, respectively. On the other hand, services still posted a growth of 1.4 percent during the period.
On the expenditure side, the PSA reported that items that declined are gross capital formation,18.3 percent; exports, 3 percent; and imports, 9 percent.
“On the demand side, household consumption significantly slowed down by 0.2 percent as almost all items posted weaker growth. An exception was household spending on health, which grew by 11.5 percent, faster than the 6.9 percent in Q4 2019,” Chua said.
“Meanwhile, government spending grew by 7.1 percent, reflecting the government’s commitment to implement its programs. Though slower than the 17 percent in Q4 2019 when the national government executed its catch-up spending for 2019, this is still higher than the 6.4 percent growth in government expenditure in the same period last year,” he added.
Chua cited the April 2020 World Economic Outlook of the International Monetary Fund, wherein the global economy is projected to contract by 3 percent this year and could beat the 1.7 percent drop in GDP recorded a year after the 2008 global financial crisis.
“Where we are now could potentially be the worst global recession since the great depression of the 1930s,” Chua said.
Well-positioned
Despite the challenges, Chua said the Philippines is well-positioned to recover strongly because of the country’s solid macroeconomic and fiscal management, as he hopes the Philippine economy can have a V-shaped recovery and end the year with a “respectable performance.”
“In the second quarter we know that April will be very bad because ECQ… But we also know that starting May, two thirds of the country have been put under the GCQ (general community quarantine). And that is basically light that we are seeing at the end of the tunnel,” Chua said.
“Now we will use our policies, proactively to ensure that we gradually normalize. We are hoping that with mega swabbing, 30,000 tests per day by the end of May, then we can start to reverse the economic trajectory by June so that by the second half of the year, we can fully recover,” he added.
Chua said while the full year target of 6.5 to 7.5 percent stays, the reality is the emerging number for 2020 is going to be flat or slightly negative.
“Now, the first quarter, I think, is still respectable given the very difficult environment that we are in, second quarter might be worse, but we are using our policies to proactively manage our trajectory, so that by the second half we can recover gradually,” Chua said.
“So for now, the DBCC (Development Budget Coordination Committee) is sticking with the -0.8 to zero growth projection for the year. And we will see over the months, if we need to adapt and be more realistic, but I think with the progress that we are seeing on the health side, there is a very strong chance that we will have a good recovery,” he added.
“In the coming weeks, the economic team and our legislators will work out an economic recovery program that will gradually get people back to work, get businesses to normalize, and get our country back on track to achieve our pre-crisis growth and job potential. In this new normal that we are facing, structural reforms are needed to improve our resiliency and help us prepare for similar challenges in the future,” he also said.
Stimulating the economy is key
Chua said stimulating the economy needs to begin with stimulating domestic demand or consumption.
“Demand will only increase if people feel safe and are confident that health care system is working for them. Stimulating domestic demand can begin with ensuring that agricultural production, food manufacturing, and the entire value-chain — including logistics from the farm to the table — are able to operate at the highest possible capacity within the parameters that will protect the health and well-being of both producers and consumers,” Chua said.
“We remain committed to getting our ‘Build, Build, Build’ program back on track. We have proven over the past few years that we can actually implement infrastructure projects at an accelerated pace and create millions of jobs while reducing the cost of logistics, especially for micro, small, and medium enterprises. Even as we ramp up implementation of our infrastructure projects, we are very much aware of the health risks. Thus, we will have to reprioritize projects and will be putting in place stringent health and safety measures,” he added.
Chua also said digital infrastructure needs to be improved, while the digital divide needs to be addressed.
“A number of structural reforms are also needed and be put in place. Before the COVID-19 crisis, we were on track to becoming an upper-middle income country this year. If we can quickly transition to the new normal, we can aspire for so much more,” Chua said.
“These are extraordinarily trying times and the road ahead of us continues to be challenging and uncertain. Bear in mind that this crisis, like others before it, shall also pass, especially because we are working together as a nation,” he added.
Deeper into negative territory
In a separate statement, Carlos Dominguez, Department of Finance secretary, said yesterday he sees growth numbers heading deeper to negative territory in the second quarter with the economy in an extended stupor, before mounting a hoped-for bounce back in the year’s second semester.
But economic expansion and the state of the government’s bounce-back plan in the year’s second semester is contingent on whether the tide has turned and an effective cure or vaccine will have been released commercially by then, Dominguez said.
Although COVID-19 is an unprecedented health crisis, he said the Philippines is on solid footing to meet the challenges of this contagion, given the country’s strong macroeconomic fundamentals.
Meanwhile, Nicholas Mapa, ING Bank Manila senior economist, said in a statement yesterday with the contraction in the first quarter GDP, he expects growth for the year to decline by 2.9 percent, a downgrade from the earlier projection of -2.2 percent.
“The Philippines will likely post a technical recession in 2020 as 1Q slipped into contraction as 1Q GDP showcases how detrimental the lockdown can be for the economy,” Mapa said.
“We expect at least another 25 basis points rate cut by the BSP (Bangko Sentral ng Pilipinas), as early as Thursday and a possible upsizing of the government’s social amelioration package and income replacement programs coupled with an aggressive spending plan on construction once the lockdown is lifted,” he added.
Hopeful of avoiding recession
Malacanang regrets the contraction of the country’s economic growth and expects the prolonged ECQ in April and the first half of May to further bring down the growth rate.
Presidential spokesman Harry Roque, however, said Malacanang is hopeful that a recession would be avoided especially as work in some industries and business in several areas are already expected to resume this month.
Recession occurs when an economy experiences at least two consecutive quarters of contraction.
“ We’re hoping that pursuant to the V strategy, growth might go up by the time that we hit the third quarter. We’re hoping),” Roque said.
Roque said government is also banking on the resumption and pursuit of some infrastructure programs under the Build, Build, Build to boost the country’s growth.
He said the Philippines continues to have “very sound economic fundamentals” as evidenced by very good credit rating and very strong peso which would help the country recover.
“We expect of course the economy to shrink even more during the month of April because the whole month of April was basically under ECQ and the first two weeks of May as well. So we definitely expect a big contraction. But the economic planners are very vigilant, we foresee a V-shape of economic recovery… we expect a very strong rebound courtesy of the Build, Build, Build program of the government, and number one, very prudent fiscal policy as well as prudent monetary policy,” he added.
