June 07, 2015

GDP grows 5.2% YoY in 1Q15, below expectations

The government announced yesterday that the Philippine economy grew 5.2% YoY in 1Q15, the lowest in three years and way below the consensus forecast of 6.4% growth. GDP growth in 1Q15 was lower than the 5.6% growth in 1Q14 and down from 6.6% in 4Q14, due to weak government spending and lower exports.

Net exports (difference between exports and imports) comprise only a small share of the economy but was a drag to GDP growth, subtracting 1.8 percentage points (pps) off the overall rate vs. a 0.5 pps contribution in 4Q14. Manufacturing grew at its weakest pace since 4Q11, up 5.9%, as exports slowed, increasing by on 1.0% in real terms from a 12.7% growth in 1Q14 and 12.8% in 4Q14. Economic Planning Secretary Arsenio Balisacan blamed the slowdown to sluggish demand in China and some emerging economies.

Another drag to GDP growth was weak government spending. Government spending contributed 0.5 pps to 1Q15’s GDP growth, lower than the 0.7 pps contribution in 4Q14. Spending growth decelerated to 4.8% in 1Q15, down from a 9.4% growth in 4Q14. The decline was attributed to the slower than programmed pace of public spending, particularly the decline in public construction, which dropped 24.6% in 1Q15.

Meanwhile, household consumption growth climbed 5.4% in 1Q15, an acceleration from the 5.0% growth in 4Q14. This sector contributed 3.7 pps towards the overall growth rate, an improvement from the 3.6 pps contribution in 4Q14.

Another bright spot was fixed investments, which climbed 10.1%. Including inventories, total capital formation increased by 11.8% and contributed ~2.8 pps to the overall growth rate. Investments in durable equipment increased by 14.3% while construction spending grew by 5.7%, with higher private construction (up 14.2%) more than making up for decline in public construction (down 24.6%).

Our take: Despite the disappointing numbers, the government remains optimistic it could meet at least the low end of its 7-8% target. We believe this could be achieved if government raises spending, especially towards infrastructure to further perk up the economy and mitigate the impact of weak global demand. In a recent press interview, the budget secretary noted that government spending has been rising (+9.6% in Feb and +11.2% in Mar) after posting a 5.4% contracting in Jan, and should continue to show this trend in the second quarter.

With government spending growth starting to accelerate and private consumption holding fairly steady, the government expects the Philippine economy will grow at a faster rate for the rest of the year. In the meantime, the disappointing results will weigh on market sentiment. – WealthSec