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GDP likely contracted by 8.5% in Q4

Consumer spending likely increased in the fourth quarter, as Filipinos spent more during the holiday season. — PHILIPPINE STAR/MICHAEL VARCAS

By Beatrice M. Laforga, Reporter

THE Philippines’ gross domestic product (GDP) likely contracted slower in the fourth quarter due to a pickup in economic activity as lockdown restrictions were further eased and higher consumer spending during the holiday season.

A BusinessWorld poll of 18 economists and one institution last week yielded a median GDP contraction of 8.5% for the fourth quarter and 9.5% for the full year. Economic output grew by 6.7% in the fourth quarter of 2019, and by 6% during the year.

The quarterly forecast is less severe than the 11.5% slump seen in the third quarter and 16.9% contraction in the second quarter.

Q4 and full-year 2020 GDP forecast

The full-year GDP contraction, if realized, would be the first decline since 1998 (0.5%) and the steepest on record based on available data dating back to 1947. It would surpass the 7% and 6.9% slump in 1984 and 1985, respectively.

The poll’s median estimate of a 9.5% slump for 2020 compares with 8.3% projected by the International Monetary Fund, 8.1% by the World Bank, and 8.5% by the Asian Development Bank. Fitch Ratings and Moody’s Investors Service gave contraction estimates of 8.5% and 8.7%, respectively, while ASEAN+3 Macroeconomic Research Office sees the GDP slump at 7.6%.

The Philippine Statistics Authority (PSA) will release GDP data on Jan. 28, a day after the release of latest quarterly data on agriculture and the December international trade deficit on Jan. 27.

Economists said the GDP decline likely softened in the fourth quarter due to further easing of lockdown restrictions and increased consumer spending during the holidays. Positive news on the development of a coronavirus disease 2019 (COVID-19) vaccine also likely helped boost consumer confidence.

“We forecast that the GDP declined at a slower pace of 6% year on year in 4Q20 from 11.5% year on year in 3Q20. In our estimates, we considered a more relaxed overall quarantine restrictions, which likely resulted in less subdued consumer spending,” Alvin Joseph A. Arogo, vice-president and head of equity research division at the Philippine National Bank (PNB), said via e-mail.

“Consumer confidence was also likely boosted by positive developments regarding the COVID-19 vaccine. Our full-year 2020 GDP forecast is -8.9% year on year,” he added.

Michael L. Ricafort, chief economist at Rizal Commercial Banking Corp., said the fourth- quarter GDP might have improved slightly from the previous quarters on “the pickup in spending by both businesses and consumers for the Christmas season, thereby also entailing more economic activities that generated more jobs.” Consumer spending accounts for at least 70% of the economy.

Mr. Ricafort said the seasonal increase in remittances of overseas Filipino workers (OFWs) ahead of the Christmas and New Year holidays also helped lift economic activity.

Latest central bank data showed OFW remittances inched up by 0.3% to $2.379 billion in November, the third consecutive month of growth. This brought year-to-date remittances to $27.013 billion, down by 0.8% year on year.

However, a string of strong typhoons in Luzon, subdued consumer and business sentiment, and insufficient fiscal boost from the government, weighed on the fourth-quarter GDP.

“We expect a 12.2% year-on-year contraction in 4Q2020 GDP vs 4Q2019; This translates to a FY2020 GDP decline of 10.6% vs FY2019,” said Emilio S. Neri, Jr., the lead economist of the Bank of the Philippine Islands.

The major reasons for these estimates include the major typhoons and floods in October and early November, which had a significant drag on economic performance in Cagayan Valley and Eastern Metro Manila economic performance, he said. “While not as serious as the drags of Ondoy and Pepeng in 2009, we believe this had a substantial dent on consumer and investment behavior in Metro Manila through late November,” Mr. Neri said.

Kanika Bhatnagar, an economist at ANZ Research, said the Philippine economy’s recovery had been slow due to “inadequate fiscal delivery and a weak labor market.”

In an e-mail, Ms. Bhatnagar said consumer spending might have been dampened by the high jobless rate, while investments remained sluggish as banks tightened lending.

“Also likely weighing heavily on the overall GDP numbers would be the absence of capital formation, which will likely post another startling double-digit drop as indicated by the sharp pullback in capital goods imports for the second half of 2020,” Nicholas Antonio T. Mapa, the senior economist at the ING Bank N.V. Manila Branch, said.

“Poor road vehicle sales on a year-on-year basis, cancellation of aircraft orders and a likely full slowdown in new construction projects all point to a severe contraction for this sector,” he added.

Industry data showed car sales reached 27,596 units in December, down by 18% from a year ago. Full-year sales stood at 223,793 units, 39.5% lower than in 2019.

Faster inflation, especially in food items and fuel products, during the period also hampered the economy’s recovery, according to Colegio de San Juan de Letran Graduate School Dean Emmanuel J. Lopez.

Headline inflation quickened to a 22-month high in December, rising faster at 3.5% from the 3.3% in November, due to a spike in food prices and nonalcoholic beverages. This brought the average inflation for 2020 to 2.6%, within the Bangko Sentral ng Pilipinas’ 2-4% target.

Noelan Arbis, an economist at Hongkong and Shanghai Banking Corp. Ltd. (HSBC) who expects GDP to have shrunk by 9% in the fourth quarter and by 9.7% for the entire year, said economic activity might have picked up amid relaxed quarantine restrictions in the past three months of 2020, while financial markets continued to receive support from the accommodative stance of the central bank.

“The outlook for 2021 depends on the government’s handling of the pandemic and its vaccine rollout. We expect GDP growth of 6.5% in 2021, barring a new wave of COVID-19 infections and vaccine inoculations beginning sometime in the first half of the year,” Mr. Arbis said.

Badly hit sectors such as tourism and commercial aviation are expected to see a prolonged weakness and could drag the economy’s recovery, said IHS Markit Asia-Pacific Economist Ravis Biswas, who gave a 6.3% contraction GDP estimate for the fourth quarter and an 8.9% slump for 2020.

“The outlook for 2021 is for a strong economic recovery based on a gradual rollout of COVID-19 vaccines during 2021 in the Philippines as well as a strong economic rebound in key export markets such as the US, China and the EU. IHS Markit forecasts that the Philippine economy will rebound strongly in 2021, growing at a pace of 7.7% year on year,” he added.

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