Philippines: Domestic demand is 2Q’s silver lining

The economy slowed to 6% growth in the second quarter, below the consensus forecast and the government’s target rate.

• Business spending accelerated to 21% YoY growth in 2Q from 1Q’s 12% and 2Q2017’s 7.6% pace.
• Construction and durable equipment investment accelerated on the back of infrastructure spending and capacity expansion (consistent with strong imports of capital equipment in 2Q).
• Government spending also improved with growth of 12%, faster than the year-ago growth of 7.6%.
• Household spending moderated to a 5.6% increase YoY from 6% in the same period last year. High inflation and weak agriculture production (rising 0.2% YoY in 2Q from last year’s 6.3%) weakened purchasing power and restrained household spending but almost 6% growth is still respectable.
• The moderation in household spending is also seen in slower manufacturing growth of 5.6% in 2Q from 8% last year. Higher take-home income from income tax reform offset the combined impact of high inflation and weak agriculture output.
• The downside surprise also came from a deterioration of the trade sector. High import growth coupled with weaker export performance weighed on overall GDP growth. Strong imports are a manifestation of strong domestic demand. A strong private sector performance and the government’s aggressive infrastructure catch-up programme contributed to the worsening trade imbalance while exports remained weak despite the multi-year weakness in the Philippine peso.

We cut out forecast for 2018 GDP growth to 6.3% from our earlier forecast of 6.8%.