Coronavirus cripples economy in Q1

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(FILE PHOTO)

Metro Manila (CNN Philippines, May 7) – The Philippine economy pulled back in the first quarter, contracting by 0.2 percent as the COVID-19 pandemic leaves millions of businesses and households paralyzed under lockdown.

The Philippine Statistics Authority said the local economy shrank compared to January-March 2019, when it grew by 5.7 percent when computed using 2018 prices. This is also the first time since the fourth quarter of 1998 when the economy contracted, at the time bogged down by the Asian Financial Crisis and a bad hit from El Niño, Acting Secretary Karl Chua of the National Economic and Development Authority said Thursday.

He attributed the worst two-decade drop to three things: the Taal volcano eruption in January, the local transmission of the novel coronavirus, and the subsequent declaration of an enhanced community quarantine in Luzon – which accounts for 70 percent of the national output – and copied by other provinces in the Visayas and Mindanao.

"Containing the spread of the virus and saving hundreds of thousands of lives through the imposition of the ECQ has come at great cost to the Philippine economy," Chua said in a press briefing, adding that the narrow contraction was "respectable" compared to how other economies are faring.

RELATED: Luzon braces for massive economic meltdown due to lockdown

Global growth has also slumped, with economists saying this could be the worst performance since the Great Depression in the 1930s.

Compared to the last three months of 2019, domestic output collapsed by 5.1 percent. The agriculture and industrial sectors slumped by 0.4 percent and 3 percent, respectively, suffering from the first two weeks of Luzon under lockdown. Meanwhile, the services sector managed to grow by 1.4 percent, but not enough to lift the overall performance, National Statistician Dennis Mapa said.

The rebasing of government figures in measuring economic trends now uses 2018 prices, deemed a more accurate snapshot of local developments. Prior to this, the PSA has been using prices from the year 2000 for comparison.

In terms of production, finance and insurance saw the biggest lift, rising by 9.6 percent during the period. However, manufacturing, transportation and storage, as well as accommodation and food service activities pulled down growth. The tourism sector has been hit hardest by the global pandemic, with cancelled local and international flights since early this year.

Government spending also grew by 7.1 percent, but was still a letdown when compared to the 17 percent pickup during the previous quarter. Dwindling inventories, declines in durable equipment, and weaker construction tempered expansion plans.

Consumer spending – which usually drives economic activity as people eat, shop, and spend time outdoors – managed a mere 0.2 percent pickup, attributed only to households investing on health-related expenses as they brace for infections.

READ: Duterte adviser bats for gradual reopening of malls, restaurants, public transport after Luzon lockdown

Q2 worse

The worst may not be over for the Philippines, with Chua noting that the ECQ was extended for six weeks in the country's main financial hub. 

"Second quarter (growth) might be worse but we are using our policies to proactively manage our trajectory so that by the second half, we can recover gradually... We will see over the months if we need to be adaptive and be more realistic, but I think with the progress we are seeing on the health side, there's a very strong chance that we will have a good recovery," he added, noting that a rebound to growth may be expected during the second half of the year.

Chua noted that the lifting of the strict stay-at-home rules in other parts of the country starting this month could revive some business activities, with authorities seeing a V-shaped recovery path.

Even Malacañang foresees that growth will slump even further in the second quarter.

"We expect the economy to shrink even more during the month of April because the whole month was basically under ECQ and in May, as well," Presidential Spokesperson Harry Roque, Jr. said in a separate media briefing. "There will be a steep decline in the GDP for the second quarter. But we expect a very strong rebound through the government's 'Build, Build, Build' program."

Chief market strategist of BDO Unibank Jonathan Ravales said he predicts the economy to contract by at least three percent in the second quarter. This can be expected, he said, considering the country lost the opportunity to do a lot of infrastructure spending in the summer due to the pandemic.

But there is a silver lining to this, according to Ravales.

“I guess if we look at the internet, the informal economy is well and alive,” he told CNN Philippines on Thursday. “If you have a Facebook, there's such a thing as a marketplace. There's a Viber and there are communities there. They're actually thriving. It's just that it's the underground economy.”

Meanwhile, economic managers have said that they are now looking at a "zero growth" ​to a 0.8 contraction scenario for 2020, abandoning what used to be a 6.5-7.5 percent growth target as the coronavirus crisis hounds the economy and hijacks expansion plans.

In 2019, the economy grew by 6 percent – revised to take into account the 2018 base year. It was a slow start last year with the national budget delayed by four months, leaving new and continuing projects unfunded during the first semester. 

The COVID-19 crisis is estimated to cost businesses some ₱700 billion in losses, which could go as high as ₱1.1 trillion for the entire economy, Chua previously said. Meanwhile, Bangko Sentral ng Pilipinas Governor Benjamin Diokno has said that the economy will recover via a U-shaped trajectory, plunging this year before returning to the 6 percent level by 2021.

The revival of infrastructure projects can also help stimulate activity, Chua said.

​"The key here in the recovery plan is first, to enhanced the confidence of the people that it is safe to be at home, to go to the groceries, it is safe to work. That is our top priority," the Cabinet official added, pointing out that expanded COVID-19 testing will help policymakers decide on relaxing ECQ measures.

Sustained contraction seen

Bangko Sentral ng Pilipinas Governor Benjamin Diokno said he was "disappointed" with the first-quarter slide, adding that he expects the drop to continue until the third quarter.

"The BSP expects growth to contract in 2020. The outlook takes into account the contraction in tourist receipts and airline revenues, the decline in Philippine exports, a reduction in remittances from overseas Filipinos, and slower household consumption owing to various containment measures across the country," Diokno said. He asserted that the economy can bounce back by the last three months of the year.

Diokno took a different view from Chua, saying he expects a U-shape or more gradual recovery in domestic activity.

Some market watchers took the worse-than-expected economic turnout as a sign of a sustained contraction.

"It’s all but official. The Philippines will likely post a technical recession in 2020 as 1Q slipped into contraction," ING Bank senior economist Nicholas Antonio Mapa said, saying the dismal print showed "how detrimental the lockdown can be for the economy."

RELATED: DTI issues list of allowed sectors to work during ECQ and GCQ

Mapa said it's up to government to plug the huge gap in domestic activity, as most private businesses remain dark.

Analysts at global bank HSBC also said that economic performance will worsen this quarter, but additional fiscal stimulus could help counter this: "Fiscal policy has been relatively slow to respond. Slow passage of the stimulus could lead to continued economic contraction for the remainder of the year and limit the economy's ability to bounce back once the pandemic passes."

This was echoed by Ravales who said it is imperative that Congress passes the pending bill on the ₱700-billion post-quarantine economic stimulus package in order to keep jobs and businesses afloat.

“That should provide the potential U-shape recovery. A delay of the passage of these reforms is going to be difficult,” he said.

The ECQ in Metro Manila, Calabarzon, Central Luzon, Davao City, and Cebu will last until May 15, with no word yet regarding a possible lifting or extension.

Both analysts said the slowdown will likely trigger another interest rate cut from the BSP, but Diokno said the 1.25 percentage point cut of the key yield is already "appropriate" for now.