Philippine economic performance continued to be anemic this third quarter of 2020. Year on year, the economy contracted by 11.5 percent as the country continues to grapple with the right policy levers to bring back confidence and economic activity.
Although this is already quite an improvement compared to the -16.5 percent contraction in the second quarter, the country is still experiencing a significant slowdown. Thus, the questions that arise from this result are—how long are we going to be in this contracting stage? What will be the sectors that can help us get out of this crisis soonest?
To respond to these, we analyzed the details of the report generated by the Philippine Statistics Authority (PSA), we find that there are both bright and dark spots that should be highlighted.
First, the bright spot is on the faster recovery of manufacturing from a deep slump of -21.25 in the second quarter, it was able to trim the slowdown to -9.7. Although still contracting, the rate of contraction has slowed down despite the imposition of the tough modified enhanced community quarantine (MECQ) in August. This, in a way, is suggesting that activities are picking up in the higher value-added sectors and possibly more integrated to the global value chain.
Related to the improvement in manufacturing is the relative improvement of trade data during the same period. The trade data is critical to approximate how strong is the recovery of our trade partners, particularly China. With Chinese 3rd quarter gross domestic product (GDP) at 4.9 percent fueled by increasing industrial production which should be pulling up the countries in its global value chains.
Exports improved from -37 percent contraction to -14 percent, while imports is at a much slower -22 contraction. If factory outputs continue to improve, then we can see manufacturing trimming its contraction further in this 4th quarter ahead of a much earlier recovery next year.
The challenge, however, is that manufacturing contributes only at most about 1/5 of total output. Services led by wholesale and retail trade is the most exposed to the lockdown impacts. With about 17 percent of GDP, the sector also exhibited an improving level of contraction from almost 14 percent in 2nd quarter to -5 in the 3rd quarter. This implies that trading activity has improved despite the continuing lockdowns.
It is possible that some of these improvements came from the migration to online selling of even the large retailers and suppliers. The July labor force survey also hints that the decrease in unemployment did not come from new jobs, but from the increase of self-employed. It maybe that retrenched workers find opportunities to become self-employed during the period—effectively increasing retailers and suppliers. Hence, about 40 percent of the economy exhibited strong potential to recover based on these figures and in spite of the imposition of the MECQ in major economic activity areas of the country.
These private sector-led activities, however, were not equally supported on the expenditure side. In particular, household consumption remained slumped, contracting at a still high level of -9.3 percent from -15 percent in the second quarter. Historically accounting for more than 70 percent of expenditures, it only improved marginally.
Overseas Filipino workers remittances, which were erratic during the quarter, may have led family recipients to lessen expenditures and focus only on essentials. For the second straight quarter, household consumption prioritization have remained around communication, utilities and food. All the other elements of the consumer baskets have all exhibited declining shares and declining expenditures.
The ADBI survey of Asean economies released this September showed that the Philippines has the highest job loss in the region of 71 percent followed by Vietnam of only 38 percent. The same survey showed that 83 percent of the surveyed reduced their consumption/expenditures.
This effectively shows why consumption barely improved. Underlying all of these conditions is the still high level of worry of catching Covid as revealed in the September SWS Survey.
The survey says that 85 percent of the population remained afraid of Covid, implying a low level of confidence to consume and take part in sustained economic activities. Same results are exhibited by the Google mobility reports saying that the Philippines has the lowest change in movements from March this year.
As confidence remains low, it is imperative for the national government to pick up the slack. As our statement in March says—government should spend whatever it takes—so that economic slack will not fall in deep.
This third quarter, government expenditures slowed to only 5.8 percent from 22 percent in the 2nd quarter. This reflected also in the fall in construction levels further from declines of -33 percent in 2nd quarter to a worse almost -40 percent contraction in the 3rd quarter.
This implies that Build, Build, Build hardly moved even after the economy has been opened. The resources have been released so it is that we again experienced the absorptive capacity constraints.
This has to be addressed no matter what—the recovery of the economy largely depends on government handholding the sectors and providing the necessary economic activity not just liquidity.
In short, government has to spend, spend and spend to perk up household consumption and support private sector initiatives to bring back confidence.