Government-led growth
The first-quarter growth figures released last week disappointed many, as most expected growth to improve over the same quarter last year and the previous quarter (at 5.9 and 5.3 percent, respectively). With both upside and downside pressures, analysts thought the former would prevail.
What are those upward pressures? Foremost is election-related spending, both by the government (to beat the election ban and to gain favor from voters) and by politicians who unleash large sums for their electoral campaigns. Over the years, average growth in election years is indeed about one percentage point higher than in nonelection years. Stabilizing prices was the other positive push expected as inflation progressively eased from 2.9 percent in January to just 1.8 percent in March. As it turned out, the Philippine economy grew by 5.4 percent, barely improving on the previous quarter’s growth—a significant slowdown from last year’s performance.
A closer examination of the GDP growth data leads to a number of important observations: (1) growth is primarily government-induced; (2) agriculture has rebounded from three quarters of decline; (3) manufacturing has picked up; and (4) export growth has defied the global trade slowdown, but imports have outpaced our exports. Let’s look at the numbers.
The government boost to growth is seen in how government spending on consumption (18.7 percent) and infrastructure (8.2 percent) far outpaced the overall economy’s growth. While household consumption spending (up 5.3 percent) sped up from last year and the previous quarter (both at 4.7 percent), its growth still lagged behind that of the overall economy. Total investment spending (aka “capital formation”) similarly dragged overall growth, having slowed down from previous quarters to a mere 4 percent. The same is true with net exports; even as export growth of 6.2 percent outpaced overall growth, this was negated by much faster import growth of 9.9 percent. All told, growth came primarily from government spending, which is unsustainable because it was funded by continuous increases in public borrowing, and government debt is now at a record P16.7 trillion.
It’s good news that agriculture has reversed three quarters of decline, with a 2.2 percent overall sectoral growth, ranging from a 15.4 percent drop in abaca to a hefty 78.1 percent jump in tobacco production. But traditional crops remain challenged, with corn declining by 3 percent and coconut by 0.7 percent, while rice (palay) grew a modest 1.1 percent after a year-round slide last year that peaked at -12 percent in the third quarter. This means that rice output remains well below past production levels.
There is also good news in how the manufacturing sector improved in the past three quarters of its performance. The sector is crucial because this is where labor productivity is highest in our economy, generating four times more value per worker than in the agriculture, fishery, and forestry sectors, and one-and-a-half times that in the services sector. This translates to higher worker incomes and better-quality jobs therein. Several manufacturing industries posted hefty double-digit growth, notably food and beverages, tobacco, textiles, electrical equipment, machinery, paper, and paper products. But what moderated the growth down to a 4.1 percent sectoral average were basic metals (-32.6 percent), chemical products (-9.2 percent) and garments (-4 percent). Electronics, which fell by 2.9 percent, are further threatened with hiked import tariffs in the United States, although these have also been named in the tariff exemption list later issued by United States President Trump.
Exports grew faster (6.2 percent) than the overall economy and improved on performance over the past quarters. I find this remarkable in the face of an overall slowdown in global trade to 2.9 percent growth last year, from 3.7 percent in 2023. This tells me that even as world trade slows down, we can be opportunistic about our exports and find growth potentials in nontraditional markets and nontraditional export products. Indeed, some export diversification appears to have happened, as suggested by the decline in electronics’ share in our total exports from 56.9 percent in 2023 to 53.4 percent in 2024. Still, the acceleration in our imports to 9.9 percent from last year’s 2.2 percent and last quarter’s 2.7 percent negated the contribution to GDP of this export speedup. However, the bulk of the import rise was in basic electronic products (e.g., chips) that feed into our electronics exports later. If this foretells stronger electronics exports in the months ahead, it could be good news.
All told, we’ve had government-led growth so far this year. But rising public debt tells us this can’t hold for much longer. We need a more durable source of growth than that.
