GDP growth slows to 2.5% in first quarter

Economic growth slowed to 2.5 percent in the three months to March owing to weak manufacturing output, an official said yesterday.

Gross domestic product (GDP) grew 3.3 percent in the corresponding quarter of last year, said Romulo Virola, secretary general of the National Statistics and Census Board.

This year’s growth was within the official target range of 2.2-2.7 percent, he told a news conference.

Manufacturing "clearly weakened in the first quarter," Virola said.

Output by industry as a whole, including manufacturing, grew only 0.1 percent, he said. Agriculture expanded 2.3 percent while the services sector rose 4.5 percent.

The economy grew 3.6 percent in gross national product (GNP) terms in the January-March quarter, compared to 3.5 percent in the same period last year, Virola said.

GNP combines GDP, the output of goods and services, plus certain foreign transfers, including remittances by the army of overseas Filipino workers.

Immediately after reporting on the economy’s first quarter performance, the Philippine government said yesterday that it was maintaining the lower end of its 2001 growth target which has been pegged at 3.8 to 4.3 percent.

Although the target range was up for review when officials meet on June 6 to discuss the economy, the government was maintaining this forecast for now, Socio-economic Planning Under-secretary Gilbert Llanto, told a news conference.

He said the government saw second quarter gross domestic product (GDP) growth to be around 3.2-3.6 percent year-on-year. "We expect growth to kick in the second quarter," Llanto said.

In addition to the expected passage of the power reform bill and the government’s efforts to reduce its fiscal deficit which would be positive for growth, the Philippines was expecting a pick-up in commercial bank loans, he said.

"I want to remain as positive as possible," Llanto said.

According to Llanto, the technical working group (TWG) will begin discussions on June 6 to revalidate all the projections especially the impact of the growth targets on the fiscal picture. Although it is not considered virtually impossible that the GDP will expand by 4.1 percent, he said government is likely to stick to its 3.8 percent target which may become other macroeconomics targets are likely to remain, particularly inflation targets which he said will stay at six- seven as food production remains stable.

Interest rates, Llanto said, are also likely to remain on the downtrend although the specific numbers will have to be revalidated by the TWG.

Llanto said the TWG will be looking at several risk factors including the impact of the slowdown of the US economy on manufacturing, the soft labor market and the slow pick-up in construction and bank sector lending.

Llanto said government is particularly concerned about the developments in the labor sector as the Department of Labor and Employment reported a 14.7-percent increase in the number of displaced workers during the first two months of the year.

The bulk of the displacement, Llanto revealed, was in establishments in employing more than 100 workers. "On factors is that firms are shifting to more productive techniques and displacing excess labor," he said. "We also noted that the deployment of overseas workers fell by 1.5 percent. These factors that would affect our economic projections."

Llanto said several positive factors would also be considered by the TWG, including the continued stability of the inflation rate which he said expected to remain at 6-7 percent. Interest rates were also expected to remain on the downtrend.

According to Llanto, macroeconomic targets would also depend heavily on the passage of the power sector reform bill. he said this would give signals to foreign investors and creditors that the Arroyo Administration was pushing ahead with its reforms.

Although the administration was optimistic that it would be able to prevail upon Congress to pass the power reform bill, Llanto said government would not be bereft of alternative measures if the measure is not passed.

The power bill will be critical since it would help government reduce its deficit by restructuring the government-guaranteed debts of the National Power Corp. but Llanto said the management of the budget deficit could still be done even without the bill.

"Plan B for the reduction of the fiscal deficit includes tax reforms to increase revenues and more cuts in the budget to get rid of non-critical expense," Llanto said. "I don’t think government will run out of instruments with which to control the deficit."

However, Llanto said the power bill is necessary to improve the perception of investors and creditors. "It really has to do with the animal spirits," he said. "If this bill is passed, it will improve our credit rating, investors will be more bullish and the pent-up animal spirits may still be released."

Llanto also said that since the external market is very weak, growth will depend on the domestic economy. "Consumer spending will save us," he said. "OFW remittances are expected to increase and this would contribute significantly to domestic activities as micro-enterprises and consumer spending especially in rural households."

According to Llanto, there are indications of a recovery in bank lending that began to show up in February. "Hopefully this would be sustained throughout the year," he said. "We expect bank lending to slowly recover because banks want to strengthen their balance sheets."

Agriculture and services are also expected to sustain their accelerated growth rates throughout the year, especially with the El Niño weather phenomenon out of the picture. The only danger is the performance of the industry sector which could drag down the rest of the economy.