Despite the surge in the country’s gross domestic product, economists are saying that the consumer-led growth is hollow and has no real impact on the economy’s productive capacity.
According to JP Morgan, the prime movers of genuine growth have not been moving as they should, with investments which lagging behind the growth in domestic production.
JP Morgan economist Sin Beng Ong said future growth has been “based on faith” that the public sector would be able to deliver its infrastructure spending plan and work as a catalyst for private investments.
The GDP is projected to grow by seven percent this year but Ong said this raises no threat of a bust despite projections that growth in 2008 would drop to six percent.
“There is not going to be a bust because there clearly is no boom,” Ong said.
To begin with, Ong said, broad inflation rate had been low not just because of the strength of the peso but also because there was no pressure on the demand side.
“So inflation will continue to be low. There is no second-order pressure outside of the energy sector because demand simply isn’t there,” he said.
“The fact that there is no pick-up in demand is not good because that means there is no underlying demand for investments,” he added.
The strength of the current accounts in the balance of payments, Ong pointed out, is indicative of lackluster investments which means that there will be a low demand for labor and therefore demand will be low as a whole.
Ong noted that the country also has a wide gap between savings and investments, indicating that investments are being financed largely by foreign borrowings instead of internally-generated funds.
According to Ong, there is strong liquidity but this is not being mobilized into savings and investments. Moreover, he said, credit demand had been dominated by real estate and personal loans with very little showing by the manufacturing sector.
“All of these is a reflection of what we think as hollow growth because there is no pick-up in domestic demand to sustain the growth momentum,” Ong said.
“We are not sure why the GDP is so strong despite the yawning S-I gap but if we are looking for possible upturn in 2008, it will be led by the public sector,” Ong said.
This means that future growth prospects have become an article of faith, Ong said, dependent on whether or not the public sector would be able to deliver its spending program under the Medium Term Philippine Development Plan.
“The question is whether public investments could catalyze private investments and I don’t know what the answer is,” Ong said. “Theoretically, it should, especially if the government could allocate spending in a manner that will have the greatest multiplier effect.”