Oil shock slows GDP growth to 4.8% in second quarter

Soaring oil prices and drought clipped consumption and stunted the country’s economic expansion in the first half while putting the full-year growth target of 5.3 percent at risk, the government said yesterday.

Gross domestic product (GDP) growth slowed to 4.8 percent in the second quarter and to 4.7 percent in the first half, compared to 6.5 percent and 6.4 percent last year, respectively, officials said.

This means the economy, which imports virtually all of its oil requirement s, needs to grow by nearly six percent amid higher raw material prices and weak demand for the rest of the year to attain the full-year target.

The government expects the economy to grow by 5.3 percent for the whole of 2005. This target is below the 2004 GDP growth of 6.1 percent.

"Admittedly, the 5.3-percent GDP forecast for the full year rests on uneasy ground given the rising oil price and the soft external demand," Economic Planning Secretary Augusto Santos told a news conference.

However, he insisted it was "still within our grasp."

Oil prices hit new record highs after crossing $70 a barrel in Asian trading hours yesterday as a powerful hurricane threatened the crude-producing Gulf of Mexico region in the United States.

"The unabated increase in oil and consumer prices, sluggish external trade and the lethargic performance of the farm sector... carried over its effect into the second quarter of 2005," National Statistical Coordination Board chief Romulo Virola said.

Government officials said resilience in the service sector and industry meant there was still a chance of meeting the 5.3 percent growth target for 2005.

The government’s full-year GDP growth forecast rested on Dubai crude prices averaging $48.95 a barrel over the year. Dubai crude, used by Filipino refineries, is now trading above $56 a barrel.

Economists say the full-year GDP growth could still reach five percent or slightly below that.

"Rising oil prices could be a risk to growth but the strength of domestic demand should continue to support the economy," said Singapore-based CIMB-GK Research regional economist Song Seng Wun, citing remittances of Filipinos abroad which he said should exceed $10 billion this year.

Spending on beverage products as well as fuel, light and water fell in the first half, with the growth in food consumption also easing.

These factors "dampened economic growth in the first quarter of 2005 and carried over its effects into the second quarter.

Agricultural output rose by only 0.7 percent in the first half, while industry grew 4.4 percent and services expanded by 6.5 percent. All three were well below year-ago levels.

"Farm output is the main drag right now," said Dennis Arroyo, a senior official of the economic planning department.

Personal consumption, which accounts for 70 percent of the domestic economy, grew by a slower 4.9 percent in the three months to June and 4.9 percent in the first half, compared to 6.3 and 6.0 percent respectively last year.

Agriculture, which employs about 36 percent of the country’s labor force, was hit by El Nino-induced drought in the first half, leading to double-digit falls in sugarcane and corn output in the three months to June.

Exports grew by 1.1 percent in the three months to June and by 2.2 percent in the first half, compared to double-digit growth in the same periods last year.

Imports, many of them raw material inputs for the manufacturing sectors, dropped 0.9 percent in the first half, with dire implications for second half production.

Santos said the bright spots were in the mining and manufacturing sectors, as well as financial services.

President Arroyo’s economic advisers are to meet this week to review the government’s full-year GDP target of 5.3 percent. – With a report from AFP