Price spikes dampen first quarter economic growth

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Metro Manila (CNN Philippines, May 10) — The government today announced that the Philippine economy grew by 6.8 percent for the first quarter of 2018 — the 10th consecutive quarter of expansion of 6.5 percent or better. 

The Philippines almost hit the government's 2018 target of 7-8 percent gross domestic product (GDP) growth but inflation spoiled the momentum, officials said. Meeting and sustaining this target would make it easier for wealth to trickle down to the more impoverished sectors.

This year's first quarter GDP was also faster than the 6.5 percent growth recorded for the same period last year. Data from the Philippine Statistics Agency (PSA) showed that this was driven primarily by the services sector by 4.0 percentage points, followed by industry with 2.7 percentage points and agriculture with a mere 0.1 percentage point.

"If not for the first quarter 2017 to first quarter 2018 rate of increase of inflation, real GDP growth could have well been within our growth range target of 7-8 percent," Socioeconomic Planning Secretary Ernesto Pernia said in a press conference Thursday. "Inflation is the spoiler."

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Pernia added that this means that the government should keep a closer eye on inflation, not only because of its effect on GDP, but because people are greatly concerned about it.

When asked by reporters what the GDP could have been if it wasn't for inflation, Pernia said that it would have been "approaching" 7.5 percent.

"Agriculture has not been performing well, and the fisheries sub-sector," he explained. While other economic sectors did well, Pernia added that they could have all benefited from lower inflation.

He added that the Tax Reform for Acceleration and Inclusion (TRAIN) Act affected this quarter's inflation by 0.4-0.7 percentage points. The first package of TRAIN, which took effect last year, imposed higher taxes on fuel, sin products, and sugary drinks while lowering personal income tax rates. There will be another increase in the fuel excise tax imposed by the act next year.

READ: 2018 study: Rice farmers' income drops due to TRAIN

Agriculture, despite the increase in production in food staples rice and corn, grew by a mere 1.5 percent for the first quarter. Pernia attributed this to last year's El Niño and the rise of consumer prices. The fishing sub-sector, on the other hand, has been on decline for the fourth consecutive quarter at 3.7 percent.

"For inclusive growth to happen, the agriculture and fishing sector need extensive reforms," said Pernia, calling for further study on these sectors.

The industry sector posted the fastest growth this quarter at 7.9 percent backed by "Build, Build, Build",  the government's aggressive infrastructure spending program. Services was the second fastest growing sector at 7.5 percent.

On the domestic demand side, rising inflation likewise dampened private consumption due to high prices, and weakened consumer confidence. Demand was instead driven by government consumption, public construction and capital formation, again due to "Build, Build, Build."

External demand weakened significantly. Growth in the exports sector for the quarter was a mere 2.9 percent, compared to the double-digit growth it posted last year.

"Net exports therefore worsened during the quarter. This is something that we need to keep an eye on," Pernia said.

Government action

Still, President Duterte's economic team remain optimistic that the economy can reach the 7-8 percent target within the year.

Pernia expects that once inflation is addressed, the TRAIN would spur domestic demand by boosting income and consumption of taxpayers.

"However we need to boost investor and consumer confidence to sustain this growth," Pernia explained.

For consumers, he suggested addressing the effect TRAIN has on inflation. He urged the government to hasten its programs to mitigate the effects of tax reform through unconditional cash dole outs to the most affected households and the Pantawid Pasada program geared towards jeepney drivers who are affected by higher fuel prices.

READ: Diokno: Suspending TRAIN Law 'will do more harm than good'

"The more enduring solutions will require structural reforms," Pernia added. He cited lifting the quantitative restrictions on rice to reduce its retail price, amending the Agricultural Tarrification Act, restructuring the National Food Authority (NFA) to focus on buffer stocking, and addressing the rising prices of fresh fish, meat and vegetables as needed economic reforms.

Pernia suggested that the government provide skills and capacity training to farmers, fisherfolk and laborers, as well as giving them access to innovation.

He reiterated that to draw in more investors, there need to be more efforts to reduce the cost of doing business and to lift restrictions on foreign direct investments.

"Easing restrictions in public utilities, retail, trade, telecoms, and public procurement are of high priority," Pernia said.

Finance Secretary Sonny Dominguez said that the administration is ready to meet the 7-8 percent growth target.

"Our people will feel the economic benefits of these [Build, Build, Build] projects soon enough and our country would move up to upper middle-income status by the time the President leaves office in 2022," Dominguez said in a statement in response to the first quarter GDP announcement.

He added that the TRAIN law has helped provide the government with a steady flow of revenue for it to invest back to the people.

The Banko Sentral ng Pilipinas Monetary Board will meet later on Thursday to discuss whether or not to raise the interest rate to address inflation.

READ: BSP prepares for possible policy change amid rising inflation