Think tank projects 7% economic contraction this year

While Metro Manila and other key regions are reopening for business after a two-month lockdown, the recovery in the upcoming quarters may neither be as quick nor as sharp as what the government expects, New York-based think tank Global Source said.

The Philippines may post a minimum of 7 percent contraction in gross domestic product (GDP) this year, Global Source projected in a May 26 research note, downgrading its outlook from a mild GDP recession projected in April.

The last time the Philippines saw an economic recession was in 1998, when the Asian financial crisis—characterized by massive local currency devaluations against the US dollar, the collapse of property markets and a wave of corporate bankruptcies that bludgeoned banking systems—resulted in a 0.6 percent GDP contraction.

“Only a handful of countries can claim to have been prepared for the COVID-19 pandemic. The Philippines is not one of them. When local transmission began, the government resorted to the only tool it had to contain the outbreak: the lockdown hammer. It used this to close government and business, offices and schools and even public transport,” Global Source said in the research note written by economists Romeo Bernardo and Marie-Christine Tang.

By 2021, however, Global Source expects the country’s GDP to bounce back with a growth of 5 percent.

The economic cost of the 45-day lockdown was estima­ted by the government to hit P1.1 trillion, or 5.6 percent of GDP.

The think tank downgraded its 2020 GDP economic outlook as first quarter results came in blea­ker than expected: a 0.2 percent contraction as opposed to consensus forecast of a modest growth.

Global Source’s view of a deeper contraction this year was based on the following:

– Lockdowns or quarantines, in one form or another, may be needed for longer, as the government is still building up its capacity to “test, trace, treat” for COVID-19. Looser lockdown conditions may give rise to localized recurrence of infections all over, necessitating at best cycles of village-level quarantines to contain the breakouts, which means workers will continue to be at risk of getting sick or repeatedly forced to stay home.

– Physical distancing as a policy will be in place until a vaccine is discovered. This may deter many service sector acti­vities that involve close physical contact and would mean that existing plant capacities cannot be maximized, with firms that are able to, having to rely on alternative work arrangements, with probable productivity losses. One key constraint will be public transport, where physical barriers that will reduce vehicles’ carrying capacity will limit worker mobility and sap productivity as waiting time increases.

– Even if world economies will manage to get out of the crisis sooner, they will still have to face continuing challenges from deglobalization trends: US-China trade war, protectionist tendencies that may have been compounded by COVID-19 fears and decreased international cooperation

– A vaccine or cure is expec­ted to take several more months to develop, manufacture and distribute widely. In the event, it will probably be the middle of 2021 before the Philippines can be extensively vaccinated. A policy of uncontrolled herd immunity has so far failed in other countries that have superior health resources.

Global Source said that improved GDP performance in the short-term would depend on the government’s ability to prop up demand by striking the right balance between easing lockdown conditions alongside fiscal support measures, and minimizing any widespread recurrence of infections, which will be invaluable for regaining consumer and investor confidence.

“At this time, we cannot rule out a more pessimistic outcome of double-digit GDP contractions, which will happen if a second wave of widespread infections occur necessitating another extensive lockdown,” the research said. INQ