GDP growth slides; policy rates raised

PHILIPPINES - In Brief 09 Aug 2018 by Romeo Bernardo

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After adjusting down its 1Q18 economic growth estimate from 6.8% to 6.6%, government announced today that 2Q18 GDP growth slipped to 6%, far below the median 6.8% analysts’ forecast. While the headline figure is disappointing, what is striking about the 2Q18 performance is the strength of domestic demand. The combined spending for consumption and investments by households, firms and government grew by over 10% in 2Q18, compared with 8.3% in 1Q18 and 6.6% in the comparable period last year. However, higher demand was met by higher imports, resulting in a doubling of the trade gap, and hence lower GDP. A breakdown of the sources of the 6% GDP growth shows domestic demand contributing 10.5ppt and net exports -4.7ppt. Preliminary foreign trade statistics point to robust growth rates in both capital and consumer goods imports in 2Q18. Additionally, production side statistics showed that weak farm output contributed to the slower overall growth rate. Of note is continuing low growth in BPO value added which at 3.6% in 2Q18 was better than the 2.8% in 1Q18 but much lower than the 8-11% quarterly growth rates of 2017. The latest estimates bring 1H18 GDP growth to 6.3%. According to the government planning agency, the economy would need to grow 7.7% in 2H18 in order to meet its low-end 7% target. We think that with capacity constraints, rising inflation and tighter monetary policy countering the impact of fiscal stimulus, attaining a 6.5% full year GDP growth rate would be difficult. As expected, the Monetary Board raised policy rates by another 50bp this afternoon, bringing the RRP rate to 4%. It noted “some risk of inflation exceeding the target in 2019“ with latest baseline ...