Q3 GDP growth likely tempered by government underspending

Economists expect the gross domestic product (GDP) to have had grown in the third quarter at a rate near the lower end of the government’s full-year 2017 target as spending on public goods and services slowed.

“The Philippine economy likely grew 6.6 percent year-on-year in the September quarter after a 6.5-percent lift in the June quarter. Domestic demand likely remained firm, as consumers benefited from steady inflows of overseas worker remittances and a healthy job market, and investment stayed firm on the back of government-led infrastructure projects,” Moody’s Analytics said in a report last week.

The government will announce the third-quarter GDP growth performance on Thursday.

Economic managers target 6.5 to 7.5 percent growth this year, after the economy expanded by nearly 6.5 percent in the first half.

READ: 6.3-7.3% GDP growth seen in Q3

“Nonresidential construction permits were up 16.8 percent year-on-year in the first half of 2017 after a 7.8-percent rise in the same period last year. Exports also likely boosted GDP growth, as demand for semiconductors and electronics was firm during the quarter,” the research arm of debt watcher Moody’s said.

ING Bank Manila senior economist Joey Cuyegkeng also projected 6.6-percent growth for the July to September period.

“Export, loans, the peso value of remittance growth rates in the third quarter of 2017 accelerated against the third quarter of 2016. But (there were) some third-quarter weakness with slower manufacturing growth (although fourth-quarter recovery is likely given the recent October indicator) and headline and core government spending due to base effects and likely possible underperformance,” Cuyegkeng explained.

Standard Chartered Bank economist for Asia Chidu Narayanan’s forecast was a similar 6.6-percent expansion, “driven by still solid—albeit lower— domestic demand and continued services sector growth.”

“We expect infrastructure investment to have disappointed after a slower-than-expected first half, likely weighing on growth,” Narayanan said.

Ateneo de Manila University economics professor Alvin P. Ang said the GDP likely grew 6.6 percent GDP in the third quarter.

“We believe that agriculture would have grown at least 3 percent owing to less destructive typhoons during the typhoon season. Manufacturing, meanwhile, will slow down a bit in its growth to about 6.2 percent but still within expected range. Construction will also slow down to about 8 percent from double digits in the past quarters. The slack will be picked up by services particularly trade, finance and real estate which we estimate to grow at 8 percent. On expenditures, consumption will also be around 5.7 percent slowing down due to higher inflation but government will support the slack,” according to Ang.

Land Bank of the Philippines market economist Guian Angelo S. Dumalagan projected 6.5 percent, “as stronger consumer spending was likely offset by weaker annual growth in government expenditures and investments.”

The latest Department of Budget and Management data showed that while the national government’s expenditures from July to September rose 7 percent year-on-year to P683.7 billion, the actual amount fell short by 14.7 percent from the P801.1-billion program for the quarter.

The DBM had blamed the underspending in the third quarter to “lower-than-expected personnel services expenditures for the period; timing for the release of subsidy and partial billings for some programs; postponement of the Sangguniang Kabataan and Barangay elections; and savings in interest payments, and net lending due to repayment from the Power Sector Assets and Liabilities Management Corp.”

HSBC economist for Asean Noelan Arbis’ third-quarter GDP growth forecast was 6.5 percent, as the economy was “backed by strong private consumption and investments.”

“However, data also show that government expenditure appears to have slowed from the second quarter, which could indicate lower public investments. We expect this to accelerate in the future, as the government’s infrastructure drive picks up steam,” Arbis said.

For DBS Bank Ltd. economist Gundy Cahyadi, the GDP likely expanded by 6.5 percent during the July to September period, although “with some upside risks.”

“Loan growth accelerated to 19.9 percent in the third quarter, its fastest pace since 2014. This is indicative of strong domestic demand, even if the high base effects may mean investment growth is likely to have eased to 6.6 percent in the period. We expect consumption growth to also remain strong at 6.3 percent, partly supported by robust remittances flows, which are on track to reach a record-high of $28 billion this year,” Cahyadi explained.

IHS Markit Asia-Pacific chief economist Rajiv Biswas’ forecast was also 6.5 percent, as the “strong growth momentum in the third quarter is expected to be boosted by continued firm growth in consumer spending, reflecting rapid growth in household incomes, continued expansion in overseas worker remittances as well as strong growth in consumer credit.”

“Rapid growth in construction spending is also expected to support GDP growth momentum, due to continued buoyant growth in the residential construction sector while the government’s ‘Build, Build, Build’ strategy is ramping up public sector spending on infrastructure,” Biswas added.

Meanwhile, ANZ Research Asean economist Eugenia F. Victorino projected 6.3-percent growth in the third quarter, below the government’s target range.

“Private consumption is resilient. However, growth in investments and public spending is capped by high base effects. Despite the continued rise in exports, industrial production is showing signs of fatigue,” according to Victorino.

Last week, the government reported that the Volume of Production Index, a proxy of manufacturing output, contacted by 3.7 percent year-on-year in September, reversing the 11.2-percent jump a year ago.

As for London-based economic research firm Capital Economics, the Philippine economy likely expanded 6.3 percent year-on-year during the July to September period.

“Despite fears of overheating, we think the economy probably slowed a little in the third quarter. That said, we still think growth came in reasonably strongly,” Capital Economics said in a Nov. 10 report.

“Much like elsewhere in emerging Asia, export growth has been a key driver of growth this year in the Philippines. Export growth slowed to 9.1 percent year-on-year in the third quarter, from 13 percent in the second quarter (in US dollar terms). Other timely data also point to a slowdown in growth in the third quarter—industrial production eased while retail sales growth dropped off slightly,” Capital Economics noted.

The lowest growth projection was of Credit Suisse research analyst Michael Wan, at 6 percent.

“The vast majority of high frequency indicators such as industrial production, exports, capital goods imports and motor vehicle sales have all slowed down in the third quarter from the second quarter,” Wan explained. /jpv