Economic Impact of Covid-19 (Last of 7 Parts: Philippine Economy shrinks by 0.2%)

By Art Jimenez

After a two-month virtual lockdown from mid-March to May 15, President Duterte allowed the enhanced community quarantine (ECQ) to lapse in most parts of the country (including Western Visayas) that were reclassified as “low-risk areas.” However, Cebu and Mandaue Cities remain under ECQ. Moderate-risk provinces and cities were placed under general community quarantine (GCQ). Fewer areas in Luzon were placed under Modified ECQ (MECQ).

Specific economic activities for each alphabet grouping are allowed. But all told, the country has finally partially reopened itself and is hopeful for a new normalcy and eventual recovery.

In opting for Q (quarantine), Duterte chose the people’s “Health” and cast aside “Economic Wealth.” That’s when the economy began to falter.

By mid-February, attention was being focused on how much impact could COVID-19 inflict on our economy.   Economists turned to their crystal balls and predicted the country’s gross domestic product (GDP) in the first quarter of 2020 (i.e., Q1 2020). An adage (OK, a joke) goes that there are as many forecasts as there are economists. True to their profession, economists predicted a slowdown year-on-year in Q1 2020. Projections ranged from -0.8% to 4.5% and averaged at 1.8 percent.

For 2020, BSP Governor Benjamin Diokno himself projected a -0.8 percent GDP shrinkage, assuming, he said, the Q ends on May 15. Multilateral lending agencies predicted a GDP from -0.2 to 2 percent growth.

To end all speculations, the Philippine GDP shrank by -0.2 percent in Q1, 2020, according to the BSP and as released recently by the Philippine Statistics Authority (PSA). From Q1 to Q4 of 2018-2019 our GDP was on the uptrend respectively at 5.7%; 5.4%; 6.3%; and 5.7%. Then, the sudden drop to -0.2 percent in Q1, 2020!

But what exactly is GDP?

Gross Domestic Product is the total market value of all finished goods and services produced in our country within a year, which could cascade to a quarter of three months each. GDP is an economic indicator, which measures total local (or domestic) output and could be likened to a snapshot of a country’s health status, size, progress, and growth. It is usual for a country’s GDP to grow at a certain percentage year-on-year except when health (e,g., pandemic) and business-related issues (e.g., stock market crash) hit the economy (local and/or international), in which case a recession (i.e., opposite of growth) could ensue.

Philippine GDP is usually measured in two ways, namely By Industry and By Expenditure.

By Industry are measured the market values of goods and services in (1) Agriculture, Forestry, Fishing [AFF], (2) Industry, and (3) Services. There are long lines of Industry and Services classifications. Suffice it to say though that Manufacturing activities of MSMEs and tourism and travel represent Industry and Services, respectively.

According to the BSP, Q1, 2020 AFF declined year-on-year by -0.4%; Industry by -3%, and Services, positive 1.4%. Using the relative weights of each segment of the AFF, Industry, and Services, GDP declined by -0.2 percent.

The second common way of calculating GDP is by Expenditure.

Below is the List of Expenditure Items and their respective rate of growth in Q1, 2020:

0.2% Household FCE

Plus    7.1% Government FCE

Plus -18.3% Gross Capital Formation

Plus   -3.0% Exports

Less   -9.0% Imports

Equals -0.2% GDP Growth Rate

When the percentage weights are applied on the above figures, the outcome shall also be a GDP growth of -0.2 percent.

FCE stands for Final Consumption Expenditure.

Household FCE represents the consumption expenditure of the people, which is a big chunk of the GDP. These include money spent on personal, family, household needs, including expenses for health, recreation, and so on. We were all deprived much of these goods and services because of the quarantine.

Government FCE refers to all government expenses on infras and mainly on COVID-19, in support of healthcare workers, public and private hospitals, and so on.

Gross Capital Formation, the highest setback at -18.3 refers to the net investments (incoming less outgoing investments) during the GDP period. Investors and corporations held on to their money due to the dim prospects of the economy (local and global) during the pandemic.

Our foreign trade is the last addition to the GDP by Expenditure. That is, the balance of trade, (Exports less Imports) is added to the above three accounts to arrive at the GDP.

What’s in store in the second and forthcoming quarters now that the economy has partially opened?

Let the economists make their predictions, even as we remember that there are many projections as there are economists!