Notes on the first quarter GDP growth: Spinning a good news from bad economic data

GMA with her economic managers (Photo from Reuters)

GMA with her economic managers (Photo from Reuters)

Last Thursday (May 28), the National Statistical Coordination Board (NSCB) released the first quarter 2009 National Accounts. The report said that the gross domestic product (GDP) grew by 0.4%, a significant deceleration from its 3.9% growth during the same period last year.

To be fair, NSCB Secretary General Romulo Virola gave a more or less accurate description of the domestic economy. An NSCB press release attributed to him stated that the economy was “weighed down by the impact of the US financial meltdown and the global crisis, and historic declines in manufacturing and trade”.

The same statement also said that the economy is “teetering into recession” as seasonally adjusted GDP sank by 2.3% and the gross national product (GNP), by 1.2 percent. Such contractions mark the first time since 2001 when both GDP and GNP declined quarter on quarter. The contraction in seasonally adjusted GDP is also the first in two decades.

Spin doctors

But the spin doctors in Malacañang would quickly twist the hard data presented by the NSCB. Deputy presidential spokesperson Anthony Golez said a day later that contrary to the statistical body’s assessment, the economy is not on the verge of a recession. Golez projected that the GDP would not contract in the second quarter, arguing that the Economic Resiliency Plan (ERP) will prevent the decline.

Besides, a growth is still a growth no matter how small, argued Golez. National Economic and Development Authority (NEDA) undersecretary Rolando Tungpalan belabored this point further. He noted that the minimal growth the Philippines had was still better compared to its Asian neighbors. Singapore and Taiwan posted double-digit contractions while Malaysia, Taiwan and Hong Kong declined by 6-8 percent.

And finally, another deputy presidential spokesperson – on economic affairs – Gary Olivar reminded everyone that the annual GDP growth under his boss is still higher than those of Marcos, Aquino, Ramos and Estrada.

That these presidential spokespersons have to extract the way they did the “good news” from the unmistakably weak GDP figures illustrates how defensive Malacañang is in terms of the country’s economic performance.

Recession in the Philippines

The most common indicator used to ascertain a recession is two consecutive quarters of contraction in the GDP. By this definition, the Philippines would be in a state of recession if seasonally adjusted GDP would again shrink in the second quarter.

Unfortunately for the spin doctors in Malacañang, macroeconomic indicators strongly point to this possibility. Less highlighted by economic managers is the status of the country’s composite leading economic indicator (LEI). Also monitored by the NSCB, the LEI breached negative territory in the second quarter, which implies the general direction that the economy tracked during the period. For the past four quarters now, the LEI index has been on a steadily deteriorating downward course.

The LEI system was developed by the NSCB and NEDA to serve as basis for short-term forecasting of macroeconomic activity in the country. Its index is computed using the performance of 11 leading indicators, namely consumer price index, electric energy consumption, exchange rate, hotel occupancy rate, money supply, number of new business incorporations, stock price index, terms of trade index, total merchandise imports, tourist arrivals and wholesale price index.


But whether the country will technically enter into recession is immaterial as far as ordinary people are concerned. For them, economic crisis is no longer a threat but a daily reality that they have been facing for as far as they can remember. In times when the Philippines was posting relatively vibrant GDP growth rates, a great majority of Filipinos faced ever-worsening job scarcity and poverty.

To illustrate, while the annual GDP growth rate under the Arroyo administration, despite the anemic first quarter figures, remains higher than Marcos’s, et al, job scarcity is also at its worst. Unemployment rate has remained at double-digit (more than 11%) every year since 2001 with the average number of jobless workers at almost 4 million annually.

Furthermore, the number of poor Filipinos jumped by 3.8 million between 2003 and 2006. These were the years leading to the three-decade high of more than 7% growth in the GDP in 2007, which clearly shows how detached GDP growth rates are from the reality on the ground.

Economic destruction

In terms of the macroeconomy, GDP contractions in the Philippines are not comparable with contractions in industrialized economies like that of the US. Unlike in industrial countries where the GDP accurately depicts the state of domestic production, the GDP of a pre-industrial and backward Philippines shows the extent of how it is being affected by developments in the global economy.

The domestic economy has been tied to the production of raw materials and low-value added semi-manufactures for exports, mainly to the US. At the same time, the country has also become a dumping ground for imported commodities and foreign capital. Filipino production for Filipino consumption has never materialized as local productive sectors are destroyed.

The magnitude of such destruction could be seen from the state of our productive sectors, which has worsened through the decades. Manufacturing has stagnated, not moving in terms of its share to the GDP since the 1970s. Agriculture, on the other hand, has been practically obliterated, with its contribution to the domestic economy steadily declining in the last four decades.

What the GDP shows

Thus, what the GDP shows is the state of an economy deeply tied to the global economy, especially that of the US. Industrial production sank by almost 7%, its lowest in 20 years. Manufacturing, which comprised 68% of industrial production declined by more than 7 percent. Agricultural production further deteriorated, contracting by 1% in the first quarter.

With steeply falling demand in recession-hit markets like the US, exports fell dramatically. Total exports fell by more than 18% while principal merchandise exports, which include electronics, declined by almost 31 percent. Exports, which are mostly assembled from imported components, are expected to further contract in the coming months as imports in the first quarter fell by more than 19 percent. Imports on consignment basis fell by a huge 36%, reflecting drastically reduced demand from abroad.

Investments have also substantially decreased as foreign investors become more risk averse amid global economic uncertainties. Investments in fixed capital formation plunged by almost 6% while investments in durable equipment fell by almost 18 percent. Such huge declines in investments in fixed capital formation and durable equipment mean less economic activity in the coming months.

The GDP growth rates in the first quarter are way below from even the low-end of government’s revised projection of 1.8 to 2.8% expansion in the first quarter. This confirms that the impact of the global financial and economic crunch on the Philippines is much deeper than what government expected or recognized. It also exposed the hollow optimism that Malacañang officials have been peddling in the past couple of weeks.

Political costs

For the Arroyo administration, the political costs of  a string of negative GDP growths would be huge. Remember that Arroyo and her allies have aggressively hyped the country’s supposed economic growth to help dampen persistent calls to oust her unpopular government.

Amid the global recession and massive displacements, Malacañang has painted an image of a presidency on top of the economic crisis. It has repeatedly hyped the economy’s supposed resiliency due to sound government policies amid the global crunch.

All these hard sell about a strong economy under the Arroyo administration would be further exposed and discredited as the global crunch and country’s own perennial crisis deteriorate. With its reputation irreparably damaged by the 2004 electoral fraud, a long list of corruption scandals, and an atrocious human rights record, what else can the Arroyo administration use to sell itself to the people and claim legitimacy?

It appears that this regime is running out of materials to spin.


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