Philippines: Economy contracts for first time since 1998 in Q1
The economy dipped in the first quarter as disruptions from the Taal Volcano eruption in January, the Covid-19 pandemic and subsequent lockdown put in place in March combined to hammer activity. GDP contracted 0.2% in Q1 2020, after expanding 6.7% in Q4 2019. This marked the first year-on-year economic contraction since Q4 1998 and also surprised market analysts who had expected growth of 3.1%. In seasonally-adjusted quarter-on-quarter terms, the economy shrank 5.1% in Q1, contrasting the revised 1.8% expansion in Q4 (previously reported: +2.2% quarter-on-quarter).
Domestic demand was hard hit in the quarter. Fixed investment fell 4.3% on an annual basis in Q1 (Q4: +5.8% yoy), on a sharp drop in investment of durable goods equipment and construction investment. This was likely due to the volcano eruption which disrupted manufacturing activity in the Luzon region and the early effects of the pandemic on supply chains and business sentiment. Meanwhile, private consumption nearly flatlined in Q1, hitting a two-decade low, as consumers became more hesitant to spend amid heightened uncertainty and social distancing (Q1: +0.2% yoy; Q4: +5.7% yoy). Public consumption growth also moderated sharply, slowing from 17.0% in Q4 to 7.0% in Q1.
Turning to the external sector, exports of goods and services declined at the sharpest rate in seven years in Q1 as a result of the pandemic’s impact on global trade and tourism (Q1: -3.0% yoy; Q4: +0.3% yoy). Imports of goods and services, meanwhile, plunged by the greatest extent since Q1 1999, in tandem with the pullback in investment and household spending. Consequently, net exports made no contribution to growth in Q1, as in Q4.
While Q1’s result marked an over two-decade low, prospects for Q2 are even more dismal. FocusEconomics panelists project the economy will contract at a sharper rate as the full extent of the economic costs of the lockdown truly took hold in April and will likely continue to hamper activity for the rest of May and in June. Private consumption, investment, and exports will all suffer further from the quarantine measures. That said, simultaneous fiscal and monetary stimulus should help avert a deeper downturn and ensure a quick recovery.
Examining the Covid-19 damage to the outlook, Nicholas Mapa, senior economist at ING, commented:
“It’s all but official. The Philippines will likely post a technical recession in 2020 after 1Q slipped into contraction. 1Q GDP showcases how detrimental lockdown can be for the economy. […] Given the Covid-19 impact on the economy, we expect the government to redouble efforts to plug the gaps through increased spending.”