Q2 GDP slows to 4.3%

PHILIPPINES - In Brief 10 Aug 2023 by Romeo Bernardo

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We had expected economic growth to decelerate after Q1’s relatively robust 6.4% yoy expansion but the marked slowdown to 4.3%, reflecting a 0.9% seasonally-adjusted qoq contraction, is a surprise. Production numbers, from which GDP is estimated, showed lower growth rates in the three major sectors – agriculture, industry and services. (See Table 1) On the demand side, domestic demand (C+I+G) growth slackened abruptly from 7.6% in Q1 to 2.2% in Q2, suggesting that revenge spending has run its course, with a narrower trade deficit, due mainly to import contraction, pushing up GDP growth. The math shows that given the average H1 growth rate of 5.3%, H2 GDP growth would have to accelerate to 6.6% in order to reach government’s low-end 6% target for the year. On the other hand, reaching our 5.5% growth forecast requires H2 growth to average a little above 5.6%, somewhat more manageable. The question is, what could drive H2 growth above H1? The obvious one is improving public sector spending. Government underspent its Q2 budget by close to 10% and this is reflected in a 7% yoy decline in public consumption, pulling down Q2 GDP growth by 1.3ppt. But beyond that, the private side of the economy faces external and domestic headwinds that we expect will continue to drag the pace of growth. With pent-up demand easing, household consumption growth has steadily lost steam over successive quarters, normalizing to an average 6% in H1. Considering the adverse impact of inflation, particularly high food prices, it is more likely to average lower than 6% for the full year. Meanwhile, investments flattened in Q2, reflecting inventories drawdown with the run-up in interest rates probably ...