Resilient but scarred
Despite the GDP being better than our expectations, we still need to contemplate that it is a very low growth rate.
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Despite the GDP being better than our expectations, we still need to contemplate that it is a very low growth rate.
The Philippine GDP came out the other day and with growth at 2.3 percent for the second quarter of 2026, many would point to a slowdown from the 2.8 percent in the first quarter. Many would point out that this is the lowest GDP growth rate since 2011 — excluding the Covid-19 window, which saw a recession.
Comparing this to the 2.8 percent that fellow economists predicted as surveyed by our fellow newspaper, Businessworld, the GDP for the second quarter is a disappointment.
But for ATRAM, it was, to a degree, a positive surprise. We were originally forecasting GDP growth at 2.0 percent for the second quarter back in May but felt that given the updated data on agricultural production, trade, and the correction in fuel prices from May to June, it seemed that our original forecast was too bearish. And the GDP report shows our spider sense turned out to be right.
Despite the GDP being better than our expectations, we still need to contemplate that it is a very low growth rate. Upon review, we observe three trends that suggest economic scarring is getting deeper.
The most material of which is public infrastructure spending. We assumed that the path public construction would take would be similar to the 2010-2011 episode where a recovery in spending was carried over four quarters.
In other words, it was a deep contraction for public spending but quick to recover (relative to today). What the second quarter public construction spending tells us is that there was no improvement from the first quarter as the item still contracted by 32 percent year on year.
The good news is that by using the narrower contraction in national government disbursement spending for the second quarter as a base, we should look forward to a recovery in the third quarter.
Secondly, the spike in inflation also affected household consumption in the second quarter with a slowdown from 3.0 percent in the first quarter to 2.8 percent. This is the lowest growth rate since the third quarter of 2010 — excluding the negative growth rates during the Covid-19 window.
While transportation spending’s contraction of 7.5 percent in the second quarter was expected given the high fuel prices, what we flag is that restaurants and hotels spending has entered the negative territory with a decline of 0.2 percent. To put this into perspective, excluding Covid-19, this is the first time restaurant spending has contracted in the past 26 years based on the GDP data that uses 2018 as a base year.
On the production side, the problems of the past four quarters have left some scarring in real estate and private sector construction. We note that real estate and household construction slowed to 1.9 percent and 0.4 percent, respectively, in the second quarter. With interest rates on the rise, it would be difficult to encourage investment spending with the private sector still hesitant.
But let us count our blessings. The important thing is we are not in a recession and with fertility rates going down, this means that income growth is still ahead of population growth. Admittedly, it is not comforting considering the rest of our ASEAN peers are growing faster than us and focusing on meeting the bare minimum should not be the goal. Having said that, it is always worth taking stock and reflecting that it could have been worse, way worse.
Another positive is the growth in the education sector both from an income and production side.
Education grew 12.7 percent and spending 13.0 percent in the second quarter. While it can be seasonal in nature, it could be reflective of the budget that has increased spending for education.
Lastly, we were surprised by the strength of exports. The demand for semiconductors because of artificial intelligence has benefited us. Exports of goods rose 16.9 percent in the second quarter and outpaced imports, which grew by 5.5 percent. Hence, we saw some strength in manufacturing.
I am optimistic that we will see a recovery in public infrastructure spending in the second half of 2026. If core inflation continues to taper off, we may see the Bangko Sentral ng Pilipinas finally pause.
The next step would be to anticipate the rate cuts. Combined, this will help set up a more positive outlook for the economy in 2027.
