Economy shrinks in Q1; Experts tag Covid fear

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FEAR of Covid-19 still prevented consumers from spending in the first quarter, local economists said following the release of the latest GDP data on Tuesday.

The Philippine Statistics Authority (PSA) reported that GDP contracted 4.2 percent in the first quarter of the year, marking the economy’s fifth consecutive quarter of decline.

According to economists, economic recovery will only ensue if “bold spending” will be done on vaccination, testing and contact tracing. The Philippine economy is a consumption-driven one.

“The first quarter data confirm our fears. Reopening the economy through decree or through will is ineffective. Reopening the economy without putting in place the minimum necessary measures to contain Covid aggravates the situation. Reopening by itself will not change people’s fear of the virus. Hence they will not spend and invest more,” Action for Economic

Reforms Coordinator Filomeno Sta. Ana III told the BusinessMirror.

Sta. Ana said the binding constraint to growth remains the inability to contain the transmission of the virus. Only when Covid-19 transmission is contained will the economy recover.

He added that recovery is not going to be as simple as opening the economy to spur greater activity. “The close-open debate is of secondary concern.”

The government, he stressed must spend to speed up vaccination; intensify testing; and execute a systematic and well-coordinated contact tracing through the interoperability of contact-tracing apps and having contact tracers at the barangay level.

It must also put in place technical measures to address the main form of virus transmission, and continue efforts to strengthen health-care capacity.

“But what is the government doing? It doesn’t want to spend boldly to finance the essential tasks above. It prematurely opens the economy, which backfires because it eventually leads to higher transmission or another surge. Worse, decisive leadership is absent as different agencies, government units and branches are contradicting one another,” Sta. Ana said.

Weak household consumption

De La Salle University economist Maria Ella Oplas told this newspaper that the fear factor created by the pandemic has kept domestic demand muted. This accounts for the weakness in household spending.

PSA data showed Household Final Consumption Expenditure (HFCE) contracted 4.8 percent in the first quarter, worse than the 0.2-percent growth posted in the same period last year.

However, PSA data showed HFCE improved from a contraction of 15.3 percent in the second quarter last year; 9.2 percent in the third quarter; and 7.3 percent in the last quarter of 2020.

“The ECQ might have lasted for only two weeks but we are still under MECQ and those are to be blamed for the slow growth that we are experiencing right now,” Oplas said.

“In the second round [of Covid-19 cases], people really got so scared compared to last year [because based on the] news, the new variants were stronger. So people voluntarily did not go out,” she added in Filipino.

The impact of Covid-19 on the first quarter performance, Ateneo de Manila University John Gokongwei School of Management Dean Luis Dumlao said, was greater compared to the impact of the disasters that hit the country last year.

Taal Volcano’s January eruption and the imposition of the ECQ in March 2020 caused the economy to contract by 0.7 percent. Socioeconomic Planning Secretary Karl Kendrick T. Chua said the ECQ last year closed around 70 percent of the economy.

Ateneo Center for Research and Development (ACERD) Director Alvin P. Ang for his part said other factors that caused the contraction included the absence of many economic activities.

Ang noted that travel remained difficult, causing the transportation and accommodation sectors to register double-digit contractions in the first quarter.

Based on PSA data, transportation and storage contracted 18.8 percent while accommodation and food service activities contracted 20.6 percent.

“The economy contracted because a lot of activities present in 1Q20 are still muted today. Travel was still open till March 15 last year but you don’t see it now—transport and accommodation are still down,” Ang said.

Inflation, hunger

Food and non-alcoholic beverage spending among Filipino households grew 2.2 percent in the first quarter, per PSA data. However, this marked an 11-year low.

Sta. Ana said this could lead to hunger and poverty. The recent Social Weather Stations (SWS) survey had shown that one in five Filipinos experienced hunger in the last quarter of 2020 and half of the population rated themselves poor, he noted.

“Provide subsidies to public-utility vehicles for their sustained operations. Give relief [ayuda] to the poor, the hungry and the unemployed,” Sta. Ana said.

However, Ang said, the slowdown in food and non-alcoholic beverage consumption may have been caused by the high prices.

Dumlao added the impact of African swine fever and supply chain disruptions in vegetables. Meat and vegetable prices averaged 20 percent and 15 percent, respectively.

Ang also cited an increase in health expenses—4.8 percent in the first quarter, the highest since the first quarter of 2020 when it was at 8.4 percent.

“As food is essential, it slowed down possibly due to higher food prices. There was also a reallocation for health expenditures which were not observed in the last three quarters,” Ang said.

Outlook

Oplas said consumption will stay weak while consumers fear the virus. This will also keep GDP performance in the second quarter muted.

To date, Chua noted, a total of 2.4 million vaccine doses have been administered to A1 to A4 priority groups as of May 9.

“The first round of vaccination is for senior citizens and people with comorbidity. These are people who are really not going out to spend. So, unless we see intensive vaccination, I don’t think that there will be improvements at all,” Oplas said.

However, Ang said given base effects, there could be some improvement in second quarter data. He noted that quarantine restrictions are not that tight this year. Relaxed restrictions coupled with improved Covid-19 management will give the economy a much-needed boost, Ang added.

Chua said the economic team has recalibrated its approach to the pandemic by managing risks this year rather than imposing blanket quarantines as in 2020.

“Our aversion to risk for the most part of 2020 has placed the country in a long period of quarantine. This came at a huge cost to the economy and the people. In 2020, GDP contracted by 9.6 percent, the lowest since 1947. Millions lost their jobs and income. This cannot go on in 2021,” Chua said.

“This time around, we also have much more latitude. Unlike last year’s ECQ, the government is taking a more calibrated approach to the present quarantines by addressing the highest sources of risks. Most sectors of the economy, including public transport, are allowed to operate in the present ECQ and MECQ period subject to health protocols,” he explained.

Catch up

While the Development Budget Coordination Committee (DBCC) has yet to meet and discuss adjustments to growth targets this year, Chua said efforts are under way to catch up for the rest of the year.

Three policy actions guide these efforts—the safe reopening of the economy; full implementation of the recovery package; and the acceleration of the vaccination program.

Chua said the government is using the present ECQ and MECQ period to improve health system capacity and work with the private sector to improve automated contact tracing.

The Neda chief said this will allow the government to bring down the gap between virus detection and isolation to 5.5 days from 7 days, potentially reducing cases “by around 51 percent, according to epidemiological models.”

“Once the present spike is over, we can implement quarantine relaxations in a phased approach to boost our recovery this year. For instance, we can move the NCR towards MGCQ, allow families and children to participate in the economy, and restart face-to-face schooling,” he said.

On the recovery package, Chua said Bayanihan 2, the 2020 GAA, the 2021 GAA, and the CREATE law will give government the capacity to fight the pandemic.

He said the government also optimized fiscal savings by giving 22.9 million individuals in the NCR Plus area P22.9 billion in supplemental social amelioration program during the recent ECQ period.

Meanwhile, Chua said government expects to cover more individuals as 2 million doses of the AstraZeneca vaccine arrived on May 8 and 193,050 doses of the Pfizer vaccine arrived on Monday night.

According to the National Task Force against Covid-19, some 27.7 million doses from various sources are due by July 2021.

All these, Chua said, will help achieve the goal of inoculating 100 percent of adults, or some 70 million Filipinos, by the end of 2021.

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