12 Nov 2020, 13:00 — 10 min read
• Larger-than-expected 3Q GDP decline of - 11.5%YoY (survey: -9.6%/UBP: -10.6%) need not deflect focus away from GDP’s sequential gain of 8%QoQ SA
• On the demand side, real investments sunk further while government consumption grew mildly. Consumption was down 9.3% compare to a year-ago but against all odds, it bounced back by 8.8%QoQ SA versus 2Q. De-stocking slashed 2.4% of 3Q GDP while the export decline eased
3Q domestic demand fell by 14.6% vs a yearago--a slight improvement over the 2Q drop of 15.6%
Largest contributor to the 3Q GDP expenditure decline was real investments (excluding inventory). It shrunk by 37% yearon-year to slightly exceed the 2Q investment collapse. We estimate that nearly 65% percent of headline GDP’s negative print was due to the hefty investment drag for the second straight quarter. It also implied a less-thanideal job market that would take its toll on consumer spending and confidence.
It was a surprise to see a hefty drop in construction of 43.5% year-on-year while investments in durable equipment declined by 34.4%. The breakdown showed public construction narrowed by 28% as private contractors struggled to comply with tight business/social pandemic controls amid a ‘realigned’ PWH budget down to just above Php500bn this year. Residential housing (- 59.2%) and industrial construction (-38.7%) posted larger drops in 3Q facing familiar logistical/health challenges posed by the pandemic. Bearish private construction was also due to stalled private property development projects driven by expectations of soaring vacancy rates in Metro Manila’s residential and office property markets amid the economic crisis, e.g, more bankruptcies, and exiting expats including POGO’s departure.
Another material quarterly decline in business capital spending (durable equipment) was led by a 40% compression of investments in transport (road, air, water and railway). Other types of machinery from specialized machinery, e.g., telecoms & sound recording equipment, generalized machinery, e.g., compressors, and other miscellaneous equipment posted declines. Silver lining in this investment segment was the 35.9% increase in office machinery and data processing equipment (or computers and related hardware). Key takeaway with sustained investment slump in construction and durable equipment is hiring or re-hiring potential is much at risk while new jobs created may not necessarily reinstate preCovid wages (less full time work).
De-stocking persisted (including rice and other agricultural commodity stocks) at the macro level in 3Q as it slashed 2.4% of GDP (vs 2Q: - 5.4% of GDP).
Household consumption fell by 9.3% year-onyear in 3Q20 for a -6.6 ppt drag to headline GDP. Consumption bounced back in 3Q with +8.8%QoQ SA (vs 2Q: -14.1%QoQ SA). While purchasing power losses and virus contraction fears persisted and weighed on household consumption, we noted that broad food demand grew 4.6% year-on-year in 3Q as consumers prioritized essentials. Despite this, what we define as basic expenditures in an EM market: broad food, rental, electricity, cooking fuel, water, and transport, still declined by 2.3%. Rent and other household utilities grew by a hefty 6.7% with WFH arrangements and online learning in the urbanized communities. These stay-at-home factors deflated consumer demand for transport services by 33.4% during the quarter. This sunk basic consumption in our estimate.
Restaurants & hotels (-50% year-on-year) and recreation & culture (-59.3%), education (- 20.8%), and clothing & footwear (-13.9%) were discretionary demand components that posted hefty drops in 3Q20. Excluding alcoholic beverages & tobacco, discretionary consumption compressed by a collective 17.4%. Meanwhile consumption of alcoholic beverages & tobacco shed 25.5%.
Government consumption grew by a modest 5.8% after Bayanihan I. On a weighted basis, government expenditures contributed +0.7 ppt to headline GDP growth. Lackluster fiscal spending was in line with 3Q primary fiscal expenditures down 19.4%QoQ vs robust 2Q growth of 50%QoQ with Bayanihan I.
Also read: Easing the burden through Bayanihan II's tax breaks
Driven by shipments of semi-conductor electronics (+1.5% year-on-year), commodity export volume fell 2.2% year-on-year--a sharp improvement over its 30.8% drop in 2Q. This is in sync with recent Customs export data1 that flagged a 6.7% compression in its 3Q dollar value following a 29.2% collapse in 2Q.
The vaunted BPO flows were hardly felt as business services on the service receipts side declined by 6.5% year-on-year alongside massive shrinkage in the other major contributors: telecoms, computer & information services (-31.1%) and travel (-80.2%). Export of services in 3Q narrowed by 32.8%.
Meanwhile imports of electronics with more than a quarter’s share of total imports, reported a 4.3% year-on-year decline. This was better than the 19.7% contraction of headline imports. Imports meant for the domestic market: fuel/oil products (-25.7%), industrial machinery & equipment (-28.3%), base metals (-19.4%) and transport equipment (-58.6%), underpinned sharply receding 3Q imports. With improving exports and fading imports, the net trade (exports - imports) eased to -6.4% of 3Q GDP.
Market Narratives by Jun Trinidad
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