In need of GDP acceleration

As a barometer of the state of the economy, the gross domestic product (GDP) is reported as a growth number. As a measure of growth, for decision-makers, this begs the question: what is a good level of growth for the economy?

Last week, the Philippine GDP growth was reported at 5.2 percent for the first quarter of 2025.

Normally this should not raise alarm bells considering it showed growth and was higher relative to our neighbors, except Vietnam.

But was that a satisfactory level of growth for the economy? For more than three quarters, the GDP performed below expectations. It may seem greedy to say this, but we should grow faster.

Beyond growth, the economy must have enough momentum to achieve key development targets and aspirations.

The economy is akin to a four-cylinder combustion engine. The expenditure approach identifies them as: personal consumption (reported as household consumption), investment spending (reported as gross capital formation), government spending, and net trade (exports less imports).

If all four-cylinders are firing in harmony, the economy would be roaring.

Among the four cylinders of this economic engine, the best chamber we have is consumption. In the first quarter results, consumption growth remained healthy, driven by sustained recovery in food and beverages. This made sense since consumption, which had been hurt by high inflation, benefited from disinflation. Inflation has been decelerating from its highs and is now trending at the lowest levels over the past five years.

The recovery in consumption may have been partially fueled by more government spending.

Government spending grew by 18.5 percent year over year in the first quarter, which was high. Whether consumption was fueled by government spending or not, what is clear is that two cylinders out of the four are delivering enough power and torque to the economy.

But this is where economic growth begins to lose momentum. Investment spending, specifically construction spending, continues to be weak. Construction spending by private firms grew by only 1.6 percent year-on-year in the first quarter.

While a single-digit growth rate would already raise eyebrows, what should set it as an ongoing concern is that this was the second quarter of deceleration. We are losing momentum on the growth of construction spending.

Investment is a crucial piston, and its movement must be in sync with consumption and government spending to drive the economy’s healing after the economic scarring from Covid-19.

Without a recovery in investment spending soon, we may see deterioration in other GDP-related indicators such as debt-to-GDP and fiscal deficit-to-GDP ratios, which are important to the Philippines’ credit standing. A downgrade of our credit rating or outlook can have a costly aftereffect.

How do we drive investment spending higher? One policy approach is for the Bangko Sentral ng Pilipinas (BSP) to reduce the cost of doing business by lowering interest rates. It has already begun to do this, which brightens the economic outlook beyond 2025, but there may be space to not only continue with the monetary expansion but also to accelerate it.

With the peso much stronger relative to the peaks over the past 12 months and inflation now below the lower bound of the targeting range, there is room to support investment spending via further interest rate cuts.

As the BSP cuts policy rates, this enables firms to refinance maturing debt at lower interest rates and adjust financial strategies to focus on longer-term horizons. If a firm can think of demand beyond the next 12-24 months, then it can consider further investments for growth.

What is a good level of growth then? For the Philippines, a satisfactory level of GDP growth is one that shows all economic cylinders firing and the economy gaining speed and momentum, or a level that reflects the government’s target range of 6-8 percent. This is achievable, particularly now that the inflation picture is more conducive to the government twisting the throttle to accelerate.