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Monitoring the Philippine Economy

Year-End Report for 2016

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Project of the De La Salle University- Angelo King Institute

By Mitzie Irene P. Conchada
Assistant Professor
School of Economics

Regina Villasor
BS Applied Economics
School of Economics

Growing at 6.9 percent in 2016, the Philippine economy realized robust full-year forecasts despite tapering external demand and extreme weather changes.

    Economic performance: Domestic consumption and capital formation drove demand-side growth while services and industry sectors lead supply-side growth.
  • Philippine economic growth topped regional performance for 2016.In line with election-year market expectations, annual growth accelerated to 6.9 percent from 6.0 percent in 2015, surpassing China (6.7 percent) and Vietnam (6.2 percent). Despite global economic slowdown, Philippine growth has continuously improved since 2015, showing resilience to external shocks with the expansion of manufacturing. On the demand side, household consumption and investments flourished with modest inflation and strong imports. On the supply side, the industry sector led as the service sector slowed down. Meanwhile, the agriculture sector continues to contract with the onslaught of weather disruptions like typhoons Karen and Lawin.
  • Major components of aggregate demand

    • Private consumption steadily rises.Comprising almost 70 percent of GDP, household consumption grew by 6.9 percent from 6.3 percent in 2015 while the inflation rate stayed low at 1.8 percent. High consumer spending leads to an optimistic outlook for business activities, boosting prospects for higher incomes and more employment to further reduce the current unemployment rate below 5.2 percent. To support rising household consumption, steady remittances rose to 4.9 percent, reaching US$29.7 billion. Moreover, fiscal expenditure increases of 8.3 percent for social programs, e.g. education, health, and conditional cash transfers, and salary hikes bolstered consumption.

    • Investments expand and outpace consumption.Fixed capital formation posted a 24.5 percent growth, with construction growing at 15.2 percent, and durable equipment at 35.5 percent. For construction, public investment grew at 29.0 percent while private investment rose to 9.5 percent. Outlays for durable equipment, infrastructure, and inventories spurred such private investments.

    • Fiscal spending remains stable.Government consumption maintained its 8.2 percent growth in the previous year. There were visible and large disparities between quarterly periods of fiscal spending, resulting from reduced maintenance spending. However, fiscal spending is planned to increase in line with the medium-term goals set forth by the Philippine Development Plan 2017-2022 and the administration.

    • Strong imports boost trade growth by end of 2016.Imports accelerated by 17.5 percent growth against the meager exports rise of 9.1 percent; however, export earnings– especially from exports to China and Taiwan – reached a total of US$56.3 billion in December due to major commodity growth. December imports payments, on the other hand, jumped to US$80.8 billion from expanding demand. In sum, full-year trade reached US$137.4 billion fueled by imports of capital, consumer and intermediate goods, and exports of agro-based, mineral, petroleum and manufactured products.

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    1 Report is based on latest available data as of March 15, 2017. For comments and questions, please email mitzie.conchada@dlsu.edu.ph



    • Major components of aggregate supply

    • In this report, we present results from an alternative to the “traditional” (TRAD) method of decomposing growth of GDP in constant prices into sector contributions. This alternative method is a “generalized” (GEN) growth decomposition that applies to GDP in constant prices (e.g., in the Philippines) and to GDP in chained prices (e.g., in Canada and the US). While TRAD recognizes only “quantity” growth as the source of a sector’s contribution to GDP growth, GEN posits that a sector’s contribution comes from “quantity” growth and from “real price” growth where this price is, by definition, the ratio of a sector’s deflator to the overall GDP deflator. The GDP deflator as the common denominator of the above ratio makes real GDP the numeraire and, thus, this ratio is the relative price or exchange value of the GDP of a sector in “GDP units,” i.e., the “real price” of a sector’s GDP. Therefore, a sector’s positive “quantity” growth contribution will be diminished if accompanied by a negative “real price” growth of the same sector that may even result in a negative net contribution by the sector to GDP growth. On the other hand, a sector’s positive “quantity” growth contribution will be enhanced if accompanied by a positive “real price” growth (see Table 3).

      • Services sector grows sturdily.Services sector comprise over half of GDP and employment and displayed a 7.5 percent growth, higher than 6.9 percent from 2015. The sector thus contributed 4.8 percentage points to annual GDP growth from the supply side. Retail trade, BPOs, tourism, financial services, and real estate subsectors posted the strongest growth.

      • Industry sector sustains higher growth.The industry sector grew by 8.4 percent, higher than 6.4 percent in the previous year. Mining and quarrying suffered a negative 0.3 percent rate of growth, likely because of DENR suspension of mining firms. Manufacturing remarkably expanded to 7.0 percent from 5.7 percent in 2015 where strong domestic demand for petroleum products and transport equipment boosted output gains from robust manufacturing. In December, the Volume of Production Index increased to 23 percent from 5 percent in the same month of 2015. Construction rose to 12.6 percent where public construction grew by an astounding 29.0 percent from 19.0 percent in 2015. Finally, electricity, gas and water supply rose to 9.6 percent

      • Agriculture sector suffers further.Drought and typhoons sheared agricultural growth to negative 1.3 percent, lowering its 10.3 percent share of GDP in 2015 by over half a percent in 2016. The subsectors of forestry and fishing continue to underperform. As the National Economic and Development Authority recommended, the government must protect the agriculture sector with capacity building investments and appropriate labor policies for the impoverished farmers.

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      The results in Table 3 are AKI-DLSU Philippine Economic Monitor calculations by applying the data in Table 1 to a "generalized" (GEN) exactly additive decomposition of GDP growth into pure growth effect (PGE) and price change effect (PCE) as an alternative to the "traditional" (TRAD) GDP growth decomposition. Analytically, PGE is the result of real GDP or “quantity” growth holding real price constant and PCE is the result of relative price or “real price” growth holding quantity constant. The GEN formulas for PGE and PCE and the TRAD formula are given, respectively, by equations (12), (13), and (17) in Dumagan, Jesus C. (2016), "Effects of Relative Prices on Contributions to the Level and Growth of Real GDP," Working Paper Series No. 2016-036, Angelo King Institute for Economic and Business Studies, De La Salle University, Manila. This alternative framework follows from the decomposition of "aggregate labor productivity" (ALP) growth in Dumagan, Jesus C. (2013), "A Generalized Exactly Additive Decomposition of Aggregate Labor Productivity Growth," Review of Income and Wealth, 59 (Issue 1): 157-168, where ALP is the ratio of GDP to total labor employment. Thus, by removing the labor variable, the decomposition of ALP growth in the latter paper yields the decomposition of GDP growth into PGE and PCE in the former paper which is implemented in Table 2.



      Figure 1. Contributions to GDP growth (y-o-y, %) from Aggregate Supply

      Source: Author’s calculations based on data in Table 2 below.



      Challenges facing the economy

      • Peso-dollar exchange rate average depreciates 3Over monthly averages in 2016, the peso weakened by 4.2 percent to ₱47.49/US$ from the previous 2015 average of ₱45.50/US$1. The cause for such depreciation and volatility is plausibly traced to local developments and global uncertainties as well as the US Fed rate hike in December 2016.

      • Sentiment in the global economy remains volatile, prompting caution.With election results in the US and the expected slowdown in China’s growth, economies are wary that this would affect adversely exchange rates as well as prices of export products. With sluggish economic recovery going on in the euro area as well as in Japan, the Philippines prepares itself for the possible negative effects by strengthening its domestic economy.
      • Weather-related risk remains an obstacle to development plans.Over the current administration, the economy is expected to expand by 50 percent in real terms. This results in per capita income rising by over 40 percent and poverty dropping to 14 percent, lifting 6 million Filipinos above poverty. However, extreme weather changes like El Niño and sudden typhoons debilitate the agricultural sector, which is key to improving food security and lowering food costs especially for the poorest of the population. More investments to enhance the agriculture sector’s resiliency to severe weather conditions are imperative.

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      3 http://www.bsp.gov.ph/statistics/spei_new/tab12_pus.htm



      Other economic news

      • BSP maintains monetary policy settings. 4Modest inflation at 1.8 percent was higher than 1.4 percent in 2015 and lower than the BSP’s target range of 2 to 4 percent. Monetary policy remains static wherein the overnight reverse repurchase rate stayed at 3.0 percent. The decision comes due to transitory supply-side influence on domestic price movements instead of monetary policy influence. Meanwhile, the PSEi closed lower in 2016, down 1.6 percent from 2015.

      • Headline inflation rises but remains below target. 4Year-on-year inflation averaged 1.8 percent. Food scarcity played a role due to weather disruptions in the supply chain while food inflation was unchanged at 2.6 percent and rice inflation turned negative. On the other end, non-food inflation rose to 0.9 percent from 0.5 percent in 2015. Additionally, domestic oil prices rose due to higher world prices.



      • Remittances surged in November 5 and December 6 2016.Cash remittances in November surged at its fastest pace in over 8 years while December posted a new high. This brought the 2016 tally above the BSP’s target. In November, remittances reached US$2.2 billion, rising 18.5 percent from US$1.9 billion in 2015. In December, remittances reached US$2.6 billion, growing 3.6 percent from US$2.5 billion last year. The December remittances originated from land-based OFWs, particularly from Asia, the Americas, and the Middle East. This is expected to offset the decline recorded in Europe.

      • Philippine Development Plan 2017-2022 close to completion. 7The National Economic and Development Authority provides medium-term priorities of the Duterte administration based on the results of the nationwide survey AmBisyon Natin 2040 as follows: infrastructure development, human capital investment, regional development, social protection and humanistic governance, a high-trust society, resilient communities, and a globally competitive knowledge economy.

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      4 http://www.bsp.gov.ph/downloads/publications/2016/annrep2016.pdf
      5 http://www.bworldonline.com/content.php?section=TopStory&title=nov.-remittance-growth-fastest-in-over-8-years&id=139207
      6 http://www.manilatimes.net/dec-remittances-hit-record-2016-tally-breaches-target/312498/
      7 http://www.neda.gov.ph/2017/01/26/statement-of-secretary-ernesto-m-pernias-on-the-performance-of-the-philippine-economy-for-the-fourth-quarter-and-full-year-2016/


Table 1. Philippine Economic Indicators

Source: Bangko Sentral ng Pilipinas, National Statistics Office, Asian Development Bank

Table 2. Level of Philippine GDP, 2015– 2016
Source: Philippine Statistical Authority, 2016

Table 3. Industry Contributions to Philippine GDP Growth, 2016

Source: DLSU-AKI Philippine Economic Monitor calculations by applying the data in Table 2 to a "generalized" (GEN) exactly addtive decomposition of GDP growth into pure growth effect (PGE) and price change effect (PCE) as an alternative to the "traditional" (TRAD) GDP growth decomposition. The GEN formulas for PGE and PCE and the TRAD formula are given, respectively, by equations (12), (13), and (17) in Dumagan, Jesus C. (2016), "Effects of Relative Prices on Contributions to the Level and Growth of Real GDP," Working Paper Series No. 2016-036, Angelo King Institute for Economic and Business Studies, De La Salle University, Manila. Analytically, PGE is the result of real GDP or “quantity” growth holding real price constant and PCE is the result of relative price or “real price” growth holding quantity constant. This alternative framework follows from the decomposition of "aggregate labor productivity" (ALP) growth in Dumagan, Jesus C. (2013), "A Generalized Exactly Additive Decomposition of Aggregate Labor Productivity Growth," Review of Income and Wealth, 59 (Issue 1): 157-168, where ALP is the ratio of GDP to total labor employment. Thus, by removing the labor variable, the decomposition of ALP growth in the latter paper yields the decomposition of GDP growth into PGE and PCE which is implemented in this Table 32.