UK think tank: Unexpected trade, manufacturing gains averted ‘double-dip’ Q2 recession

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MANILA, Philippines—The Philippines’ unexpected improvement in external trade, manufacturing and net sales performance last April despite a new round of lockdowns could lead to a bigger output in the second quarter of 2021 and avert a “double-dip” recession, according to a UK think tank on Thursday (June 10).

“The Philippine economy looks miraculously to have survived the second wave of COVID-19 without any major scars,” said Miguel Chanco, senior Asia economist of UK-based Pantheon Macroeconomics, in a report.

In his report, titled “The Philippines Won the Covid Battle—Not the War—in Q2,” Chanco said “better-than-expected external trade, manufacturing and net sales performance in April despite stricter quarantine in National Capital Region (NCR) Plus would allow a bigger output in the second quarter than the first quarter, hence avoiding a ‘double-dip’ recession.”

The paper said volume of net sales index last April, “when cases peaked and anti-virus measures were at their toughest,” fell by just 0.7 percent month-on-month and “erasing only half of the 1.4 percent bounce” in March.

“The drop likely was in part a function of spending brought forward, leading to the above-trend gain in March,” Chanco’s paper said.

NCR Plus—Metro Manila and the provinces of Bulacan, Cavite, Laguna and Rizal, which accounted for half of gross domestic product (GDP)—reverted to enhanced community quarantine (ECQ) and modified ECQ in April following a surge in COVID-19 cases.

But unlike 2020’s ECQ, when 75 percent of the economy froze, the latest most stringent quarantine levels allowed economic sectors to operate under minimum health standards.

Together with foreign trade figures for April which were not as bad as expected, Chanco conceded that “our call for a mild double-dip in GDP admittedly no longer holds water.”

“April was as bad as the second quarter could get, and it turned out to be fairly benign, considering the circumstances,” his paper said.

“The government’s more tailored approach to restrictions appears to have paid off, though mobility indicators also suggest that compliance or enforcement—likely both—was comparatively lax this time around,” it added.

Chanco said the projection for second quarter GDP was now likely 1.8 percent growth quarter-on-quarter, a reverse of his previous forecast of a 0.6 percent decline in output compared to the first quarter of 2021.

His quarter-on-quarter growth forecast would be a faster pace than the 0.3-percent increase posted in first quarter, when GDP contracted by a worse-than-expected 4.2 percent year-on-year.

Chanco said GDP was expected to grow 15 percent year-on-year during the second quarter, owing to base effects from 2020s trough when output shrank by a record 16.9 percent due to the strictest COVID-19 lockdown imposed from mid-March to May 2020.

Chanco also upgraded his full-year GDP growth forecast to 6.6 percent—within the government’s downscaled 6 to 7 percent target—from 5.4 percent.

Chanco, however, said “the second half of the year will still be very challenging for the Philippines, despite the close shave in the second quarter.”

“COVID-19 anxieties will continue to weigh on consumer and business confidence,” he said.

“The authorities have eagerly relaxed curbs in recent weeks, resulting in an incomplete compression of the second wave, and a renewed rise in cases,” Chanco added.

“Looking further ahead, herd immunity remains unlikely for another year—at best,” Chanco said.

But consumer spending was likely to remain scaled back because of two factors—“weakness of the labor market and consequent absence in real wage growth amid stubborn inflation.”

“Demand for labor clearly is struggling, creating an increasingly wide gap amid the recovery in supply,” Chanco said.

“Job openings have bottomed out, though they essentially have been stuck at around the third of the pre-COVID-19 norm since the second quarter of last year,” he added.

For Chanco, “catch-up will be the main theme in the second half, driving both investment and exports, but downside risks prevail.”

He said capital expenditures, or capex, “will get an additional lift from projects being front-loaded ahead of the presidential election in less than a year’s time.”

“This would come at the expense of the first half of 2022, though, and, in any case, the long-run outlook is bleak, judging by the signal from the slump in business loans,” he said.

“Elsewhere, exports are likely to play some catch-up, too, having fallen behind the recovery in regional shipments,” Chanco said.

“The recent stagnation in Vietnam’s exports sends a warning shot, though, that the global recovery may soon peter out,” he added.

TSB


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