World Economy

After impressive first half, Philippines GDP to slow for rest of the year

The Philippines outshone larger peers to emerge as Asia's fastest-growing economy during the second quarter. Sustaining that pace may prove more difficult.

Annual growth hit a three-year high of 7 percent during the April-June period, according to government data on Thursday, building on a 6.9 percent spike in the first three months of the year. The second-quarter performance was better than China's 6.7 annual percent expansion. India, which is yet to report figures for the comparable period, boasted Asia's fastest annual growth for the first three months of the year at 7.9 percent.

That may be as good as it gets for the Philippines for this year, analysts say.

Tailors work on items of clothing at a tailoring shop at Kamuning market in Quezon City, Metro Manila, the Philippines, on Friday, May 20, 2016.
Veejay Villafranca | Bloomberg | Getty Images

Growth in the June quarter was bolstered by seasonal factors such as election-related spending and budget front-loading. This boost should now fade.

"This particularly strong growth rate was a result of the high infrastructure spending and strong domestic demand that benefited from election-related spill overs," Sian Fenner, lead Asia economist at Oxford Economics, told CNBC's Street Signs. "But this kind of growth rates can't be maintained."

For the third quarter, she sees gross domestic product (GDP) rising 6.3 percent, which should see 2016 GDP growth come in at 6.3 percent, an estimate shared by HSBC. Australia and New Zealand Bank (ANZ) was more pessimistic, anticipating a full-year spike of 6.1 percent. The economy grew by 5.8 percent in 2015.

The Philippines held a general election in May that saw win by a landslide vote. The campaign-spending limit for each presidential and vice-presidential candidate was capped at 543.64 billion Philippine pesos ($11,757,013), with Duterte spending nearly 400 million pesos in total, local media reported.

"It's no secret that candidates spend quite a bit during the elections in the form of political ads, rallies, and events ... Many government offices also tend to front-load a lot of their expenditures early in the year prior to the election ban," said Fenner.

Indeed, a breakdown of the GDP data showed public construction and government consumption grew by 27.8 and 13.5 percent, respectively.

Philippines growth can't be sustained: Economist

Moreover, spending and investments accelerated ahead of the 2017 government budget, HSBC economist Joseph Incalcaterra said.

But domestic demand—a critical component of GDP—may weaken going forward.

"A government in transition, slowdown in public-private partnership project activities and capex peaking in the first half of the year could result in domestic demand settling for slower pace in the second half," explained Jun Trinidad, Citi economist.

Continued declines in net exports are also an obstacle, with June export sales dropping 11.4 percent on-year. Sluggish global trade is the culprit here as demand from the U.S. and Europe remains weak, according to Ferner.

Anticipated weakness in the agriculture sector could also be an issue.

Growth in the second quarter was actually pulled down by a contraction in agriculture output, and that could continue in the near-term amid challenging meteorological conditions with the onset of the weather phenomenon known as La Nina, Incalcaterra noted.

"Although agricultural GDP makes up an increasingly smaller share of GDP, it employs a disproportionately large chunk of the labor force, and output from the sector weighs heavily on inflation," he explained.

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