Government urged to tackle causes of GDP slowdown

MANILA, Philippines — The government needs a deeper diagnosis of the Philippine economy’s sharp slowdown and should go beyond catch-up spending to address structural weaknesses that are dragging investment, consumption and productivity.

In a report, GlobalSource Partners economists Diwa Guinigundo and Wilhelmina Manalac said the Philippines’ 2.3-percent growth in the second quarter was “deeply disappointing, but hardly surprising.”

They said domestic growth drivers had already been weakening even before external shocks such as the Middle East conflict and higher energy prices.

The report said faster infrastructure implementation and government catch-up programs could support a gross domestic product (GDP) rebound in the second half, but would not be enough to address deeper weaknesses.

It said the government should focus on restoring investor confidence, improving the regulatory and permitting environment, strengthening education and human capital, addressing food and energy vulnerabilities and pursuing a clearer industrial policy geared toward productivity and higher-value investment.

“The challenge is therefore not simply to achieve a statistical recovery towards the government’s 3.5 to 4.5 percent target, but to restore the foundations for sustained, investment-led and productivity-driven growth,” Guinigundo and Manalac said.

“Otherwise, further disappointing and entirely expected growth numbers may lie ahead.”

GDP growth slowed from 2.8 percent in the first quarter and 5.4 percent a year earlier. First-half growth averaged just 2.6 percent, well below the government’s full-year target of 3.5 to 4.5 percent. Growth would need to reach about 4.4 percent in the second half just to hit the lower end of the target.

Investment emerged as the biggest drag, with gross capital formation contracting by 9.2 percent in the second quarter. Meanwhile, household consumption grew by only 2.8 percent.

Bank of the Philippine Islands lead economist Emilio Neri Jr. warned that prolonged investment weakness could reduce the economy’s future growth potential.

“Prolonged weakness in investment can eventually limit the economy’s ability to expand output. If investment spending remains weak due to elevated inflation, policy uncertainty and softer demand conditions, the economy could emerge from the current slowdown with a lower growth potential than before,” he said.

BPI sees scope for growth to improve in the second half as favorable base effects and better budget execution support public construction. However, inflation risks from oil prices, adverse weather and possible second-round effects remain elevated.

Neri said the Bangko Sentral ng Pilipinas (BSP) could need to tighten policy further, adding that “a larger rate increase later in the year cannot be ruled out” if food price pressures intensify.

“A potential rebound in economic growth in the second half of the year may allow BSP to place greater emphasis on anchoring inflation expectations,” he added.