The Philippines Islands (BPI) said that if GDP exceeds the current growth trajectory, the economy needs greater industry spending.
“Recent growth in the 5-6% range shows that consumption alone is not enough to drive the economy forward. Although domestic demand remains strong, the economy does not generate a large portion of its consumption, reflecting the weakness of its production. The industry sector must play a greater role in supporting growth,” said BPI Leader Economics Economist Emilio S. Neri, Jr.
The economy grew by 5.5% in the second quarter, reaching the government’s target of 5.5-6.5% this year.
In the first half of the year, GDP growth averaged 5.4%, compared with 6.2% a year ago.
Household final consumption, which accounts for more than 70% of the economy, increased by 5.5% in the three months ended June, surpassing the 4.8% released in the second quarter of 2024.
Mr Neri noted that household consumption has not yet returned to pre-pandemic levels.
“The weaknesses in recent consumption data may partly reflect the challenge of capturing purchases through e-commerce. Access to foreign goods that can be shipped directly to consumers makes certain transactions more difficult, as certain low-value items may be exempt from surveillance,” he added.
Mr Neri said that if the government cannot cope with the structural challenges that hinder construction, manufacturing and investment, GDP growth could remain within the 5-6% range in the coming years.
“The economy must go from consumption-driven to production-driven and through policies that promote long-term investment and industrial development,” he said.
Construction growth in the second quarter was also weaker at 2%, well below the ban on election spending and well below the pre-pandemic average of 10.8%. Private sector construction has grown by double digits, but remains below pre-pandemic levels.
He added that real estate developers have taken a cautious approach to new projects due to weak demand in the middle-level market.
“The hybrid work arrangements reduce the demand for residential units near commercial areas and increase office vacancies,” Mr Neri said.
Although demand for public housing remains high, household income needs to catch up with faster rising real estate prices to get construction recycling.
Similarly, manufacturing growth also remained below the pre-pandemic 2.7% due to rising input costs and global supply chain disruption 2.7% compared with the pre-pandemic average of 5.8%.
Weaker consumption growth has also affected demand for finished products.
“Investment spending has also been slow due to poor performance in capital-intensive industries such as construction and manufacturing. The ongoing public sector spending on infrastructure is not enough to offset the weakness of private sector capital expenditures,” said Mr Neri.
He added that despite the shift to more industry spending, inflation must remain low and stable in order to continue to support consumption.
The service industry, especially in outsourcing and tourism, needs to remain competitive during the transition to greater industrial activities.
“The ideal result is that the economy has multiple growth drivers, and consumption is the basis, not the end point of itself. If the industry sector cannot improve and the service sector loses its competitive advantage, it will be difficult to grow above 6%.” – Aaron Michael C.
