Higher PH consumer prices play ‘spoiler’ in Q1 robust economy

Socioeconomic Planning Secretary Ernesto M. Pernia. INQUIRER file photo / JOAN BONDOC

High consumer prices were the “party pooper” to the Philippines’ robust economy in the first quarter, pulling down growth to 6.8 percent or below the government’s full-year target range.

While the Philippines remained among the fastest-growing economies in the region, the country’s chief economist admitted that inflation was the “spoiler,” and the gross domestic product (GDP) could have expanded by nearly 7.5 percent year-on-year during the first three months.

“In case you are interested in a small secret—if not for the first quarter 2017 to the first quarter 2018 rate of increase in inflation, real GDP growth would have been well within our growth rate target of 7-8 percent. So inflation is the spoiler, that is why we really need to focus on inflation especially because it is the number one concern expressed by Filipinos in surveys, by SWS or Pulse Asia,” Socioeconomic Planning Secretary Ernesto M. Pernia told a press conference Thursday.

In the first quarter, headline inflation averaged 3.8 percent, before the rate of increase in prices of basic goods peaked to an over five-year high of 4.5 percent in April, bringing the four-month average to 4.1 percent or beyond the government’s target range of 2-4 percent.

The Tax Reform for Acceleration and Inclusion (TRAIN) Act, coupled with a weaker peso and rising global oil prices, had been blamed for the faster inflation at the start of the year.

Signed by President Rodrigo Duterte in December, Republic Act No. 10963 or the TRAIN Law since Jan. 1 this year jacked up or slapped new excise taxes on cigarettes, sugary drinks, oil products and vehicles, among other goods, to compensate for the restructured personal income tax regime that raised the tax-exempt cap to an annual salary of P250,000.

READ: Tax reform law, admin’s biggest Christmas gift to Filipinos – Duterte

Pernia, who heads the state planning agency National Economic and Development Authority (Neda), said “practically all sectors would have benefitted from lower inflation.”

Philippine Statistics Authority data showed that in the first quarter, household consumption growth slowed to 5.6 percent from 5.9 percent a year ago and 6.2 percent a quarter ago.

In contrast, economic managers had expected consumer spending to pick up due to the TRAIN Law, which granted workers more take-home pay under the new tax rates.

But Pernia explained that “higher inflation tends to deter or soften demand for goods that are experiencing price increases.”

“People will consume as much of something when the price is higher,” Pernia added.

It did not help that the mitigating measures for poor families affected by the TRAIN Law met some delays, the Neda chief said.

“There’s usually a lag—the unconditional cash transfers were just distributed recently, and also the Pantawid Pasada has not yet been disbursed,” Pernia said, referring to the P200 a month given away to poor households and the subsidy to public utility vehicles affected by higher fuel costs, respectively, both provided for under the TRAIN Law.

“When these are disbursed, and people are able to adjust to higher purchasing power, higher income or higher money transfers to the poor for buying things, then they’ll do that. We expect household consumption to be picking up in the coming quarters,” according to Pernia.

Besides short-term aid to those impacted by high inflation, Pernia said that “the more enduring solutions will require structural reforms,” especially when it comes to food prices.

“We continue to pressure Congress to amend Republic Act No. 8178 or the Agricultural Tariffication Act. The lifting of quantitative restrictions or QRs on rice should be pursued in earnest, as it will reduce the retail price of rice by as much as P4-7 per kilogram. This will increase the purchasing power of low-income households, aside from bringing down inflation,” Pernia said.

“We also need to restructure the National Food Authority to rid it of its import monopoly and trading functions, so that it can focus on buffer stocking to meet emergencies. This reform is necessary for NFA to focus on its function of maintaining a national buffer stock for food security, and refrain from rice trading to avoid distorting the market,” Pernia added.

“Moreover, we also need to address rising prices of fresh fish, meat, and vegetables. As demand continues to rise with a growing population and expanding economy, reducing food inflation is necessary to increase people’s purchasing power,” according to Pernia.

In the first quarter, the Philippines’ GDP growth was only outpaced by Vietnam’s 7.4 percent and matched by China’s similar 6.8 percent.

Among the major sectors, the output of the agriculture sector grew 1.5 percent in the first three months and contributed 0.1 percentage point to the GDP growth; industry, up 7.9 percent to contribute 2.7 percentage points; and services, up 7 percent to account for 4 percentage points of the GDP expansion.

For Budget Secretary Benjamin E. Diokno, the Duterte administation’s ambitious infrastructure program helped sustain robust economic growth at the start of the year.

PSA data showed that government consumption jumped 13.6 percent in the first quarter, compared with 12.2-percent and 0.1-percent growth a quarter ago and a year ago, respectively.

“Increased government spending has translated to a strong showing for the Philippine economy in the first quarter… The Duterte administration’s audacious ‘Build, Build, Build’ program definitely contributed to higher government spending for the first quarter,” Diokno said in a statement, citing Department of Budget and Management data showing that actual expenditures on infrastructure and other capital outlays jumped 33.7 percent year-on-year to P157.1 billion from January to March, surpassing the program by almost a tenth.

Under “Build, Build, Build,” the government would rollout 75 “game-changing” projects, with about half targeted to be finished within President Duterte’s term, alongside spending a total of over P8 trillion on hard and modern infrastructure until 2022 in a bid to usher in the “golden age of infrastructure.”

“Moving forward, expect government spending to continue to boost our growth prospects given the staggering P3.767-trillion national budget for 2018. With the first-quarter numbers, I am confident that 7-8 percent growth is doable and our fiscal reforms will only aid us in our objectives,” the Budget chief said.

For his part, Finance Secretary Carlos G. Dominguez III said in a separate statement that “the country is on its way to achieving its targets for high growth and financial inclusion for the rest of the Duterte presidency as the government enjoys enough fiscal space to further accelerate spending on its core programs—infrastructure and human capital development—meant to keep up the Philippines’ status as one of Asia’s fastest-growing economies.”

“An even more aggressive spending from hereon on the ‘Build, Build, Build’ program and other poverty-reduction initiatives would let the Duterte administration hit its target of a GDP expansion of 7 percent or better and a reduced poverty incidence rate of 14 percent over the medium term,” said Dominguez, who heads the Duterte administration’s economic team.

“President Duterte’s commitment to attaining an investment-led and inclusive economy via a massive public spending strategy would usher in what the Asian Development Bank has forecast to be the ‘golden age’ of the Philippines’ economic growth,” according to Dominguez.

“With President Duterte’s foreign policy recalibration, which has enabled the government to secure official development assistance (ODA) from our friends in the region plus grants and concessional loans from multilateral institutions; above-target performance by our revenue agencies as a result of the TRAIN Law; and investment-grade credit ratings responsible for successful bond floats here and abroad, the government now enjoys a large headroom for high—and inclusive—growth,” the Finance chief said.

“The government’s unprecedented investments in physical and human infrastructure would supercharge the economy; attract more investments, create a lot more jobs, especially for our young workforce; and liberate millions of Filipinos from poverty—which are in keeping with President Duterte’s electoral mandate,” he added. /jpv