Philippine Economy Shrinks More Than Expected on Weak Demand

The Philippine economy contracted more than economists expected in the fourth quarter, capping its worst year on record, as private consumption remained anemic even as more businesses reopened from lockdowns.

Gross domestic product shrank 8.3% in the three months through December from a year earlier, the statistics agency said Thursday. That compared with the median estimate for a 7.9% decline in a Bloomberg survey and the third quarter’s revised 11.4% contraction.

For all of 2020, GDP plunged 9.5% as economists expected, the largest drop in government data going back to 1946. Still, the quarterly figures indicate the decline has moderated from the early months of the outbreak.

Philippine Economy Shrinks More Than Expected on Weak Demand

“Without doubt, the pandemic and its adverse economic impact are testing the economy,” Economic Planning Secretary Karl Chua said. However, the government sees “green shoots of recovery” with the gradual easing of restrictions on movement.

Stocks recouped early losses and were up 0.2% as of 12:45 p.m. in Manila. The peso was little changed.

The Philippines was among the world’s fastest-growing economies over the past decade, but is now struggling to escape recession, with analysts expecting growth to turn positive only in the second quarter. The World Bank forecasts Philippine GDP to expand 5.9% this year, below pre-pandemic levels, as restrictions on movement remain amid Southeast Asia’s second-worst virus outbreak.

President Rodrigo Duterte plans to spend a record 4.7 trillion pesos ($98 billion) this year, hoping to drive GDP growth as high as 7.5%.

Vaccines Key

“Despite the setback, we don’t expect stimulus efforts from either monetary or fiscal authorities,” said Nicholas Mapa, a senior economist at ING Bank in Manila. The central bank “is likely out of ammunition after front loading rate cuts, while the fiscal side of the fence appears content with its current modest increase in budget in 2021.”

The nation’s vaccination program will be key to any economic recovery. The government aims to vaccinate 70% of the 100 million population by the end of 2022 to achieve herd immunity, but so far has signed deals for only about one-third of the doses needed.

What Bloomberg’s Economists Say...

“The Philippines may take a longer road to recovery than its neighbors. Its movement restrictions have been more stringent and longer-lasting, and its fiscal stimulus much more conservative -- leaving economic scarring that will make it more difficult for the economy to bounce back quickly. Even with our current baseline forecast of a rebound to about 8% growth in 2021, GDP likely won’t return to its pre-pandemic peak until 1H 2022.”

-- Justin Jimenez, Asia economist

The smaller fourth-quarter contraction was driven by exports and eased movement restrictions, but both of these boosts have mostly run their course in the near term, said Alex Holmes, Asia economist at Capital Economics.

“What’s more, the economic scars from the downturn, including business insolvencies, weaker household balance sheets and high unemployment, will weigh heavily on demand for many months to come,” Holmes wrote in a research note. “We estimate that by the end of 2021 the economy will still be 10% smaller than if the pandemic had not happened.”

Other key points from Chua’s briefing Thursday:

  • Government spending rose 4.4% in the fourth quarter from a year earlier, while household consumption fell 7.2%
  • All major sectors of the economy contracted in the fourth quarter, with agriculture declining 2.5% year-on-year, industry falling 9.9% and services dropping 8.4%

    Compared to the previous quarter, GDP grew 5.6% on a seasonally adjusted basis in the final three months of the year, slower than the 6% economists were expecting

  • Quarantine restrictions reduced household spending by 801 billion pesos in 2020, and caused income loss of around 1.04 trillion pesos
  • The government believes its 1.1-trillion peso infrastructure budget can help create 1.7 million jobs
  • Labor-force surveys will be conducted monthly, to have more timely data

©2021 Bloomberg L.P.

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