The Philippine economy clocked in a slower pace of growth in the second quarter (Q2) at a surprising 6.0% which is way below the government and market consensus forecast.

But despite the disappointing Q2 GDP print, domestic demand remains robust, and there were many bright growth spots. Government consumption rose to 11.9% from a year ago at 7.6%. Private spending also increased from 7.6% (at the same period last year) to 20.7% this quarter. Construction and durable equipment, consistent with the government’s infrastructure push, has grown significantly year-on-year, with 12.9% from 4.7% and 28.6% from 6.3%, respectively.

Government managers have stressed that the heightened inflation rate, year-to-date 4.5%, is one of the main reasons for the slower-than-expected Q2 GDP growth. Household spending has slowed from 6.0% in Q2 2017 to the latest of 5.6%.

Aside from high inflation, that has prompted the BSP to hike interest rates to 50 bps, agriculture output has weakened from 12.3% in Q2 2017 to 5.4% this quarter.

Manufacturing growth, even with its recent resurgence, has marginally slowed from 8.2% in Q2 2017 to 8.1% this quarter. Also significant is mining and quarrying sector’s decline from 28.9% in Q2 2017 to merely 2.9% this quarter.

The trade balance also contributed to the slower-than-expected economic growth. Increasing import growth together with the slowly recovering export performance has also affected economic expansion in Q2.

Market inefficiencies (rice and other basic food supply issues) have contributed to the recent higher-than-expected level of prices at 4.5% year-to-date. The persistent lacklustre performance of agriculture and its output puts a comprehensive reform and review of the sectors’ policies and programs in the forefront and thereby enable higher and more inclusive economic growth.

The Economic Research Unit (ERU) has cut its 2018 GDP forecast to 6.5% from 6.8% and 2019 GDP forecast to 6.8% from 7.0%. 2018 inflation forecast is revised to 5.1% from 4.8%, while 2019 inflation is revised to 3.9% from 3.6%.

Outlook by Ruben Carlo O. Asuncion, UnionBank's Chief Economist 

Note: Any opinion or statement in the Philippine Outlook does not constitute the opinion of UBP. Your use of this document and any of its contents is at your own risk and UBP does not accept any liability for the results of any action or decision taken on the basis of or reliance on the Philippine Outlook or any of its contents.