World Bank 7.1% 3rd Quarter GDP rate could be wrong

The reported 7.1 percent Gross Domestic Product (GDP) growth rate the Aquino administration and its cheering squads have been euphoric over may in fact be an over-estimation, and the actual figure could be as low as 5.7 percent.

This conclusion is based on the World Bank’s December 2012 “Philippine Economic Update”. After mentioning the 7.1 percent growth rate in the third quarter, the Bank qualified in its seemingly trivial but really significant footnote:

“Growth in the third quarter must be tempered by the fact that statistical discrepancy explains 1.4 ppt of the 7.1 percent growth. This suggests that either third quarter growth will be revised downwards or fourth quarter growth will be lower by around two percentage points as statistical discrepancy is zeroed out in the full year growth statistic.”

“Ppt” means percentage points, which means that if the 1.4 percentage points is deducted form the 7.1 percent growth figure, the country’s GDP growth rate in the third quarter would be at a lower 5.7 percent.

The “statistical discrepancy” refers to the differences between the results of the two approaches to measuring the GDP: either as expenditures or as incomes. While these two measures theoretically should amount to the same figure, it often doesn’t, due to either misreporting or delays in data submission. However, these discrepancies are reported only for GDP estimates for each quarter, with the full year GDP corrected for such discrepancies.

This is the first time that the World Bank in its regular quarterly updates on the Philippine economy drew attention to the magnitude of the “statistical discrepancy”, and to emphasize that a GDP figure should be “tempered.”

In fact in past quarters, quarterly GDP figures were adjusted mostly upwards and only by less than 1 percentage point. For instance, the second quarter GDP rate was reported at 5.9 percent when it was announced in August. This has been revised to 6 percent. (However, the first quarter growth rate was reported in May at 6.4 percent; this has been revised though to 6.3 percent.)

That a 5.7 percent growth figure could be more accurate is bolstered by the fact that this would be more in line with the first and second quarter growth rates of 6.3 percent and 6 percent, respectively. Historically, the GDP growth rate for the third quarter is the lowest among the four quarters, as this is the ‘pause’ period for the year, before and after the heightened Christmas production and spending.

Whether an unintentional overestimation of the GDP’s third quarter growth rate or not, the “7.1 percent” GDP growth rate has been the administration’s most recent powerful propaganda tool, with the figure repeated again and again as a cheering chant to claim that 2012—despite lackluster exports, declining foreign investments, and typhoons that severely hit agriculture—was, as one newspaper put it, “one of the best years ever” for the country.

However, either at 5.7 percent or 7.1 percent, these merely mask the fact that such levels were due to the very low 3.2 percent rate in the third quarter of 2011. This is the so-called low-base effect: a higher rate of growth will be computed if the starting level is low.

Despite the World Bank’s caution on the third quarter GDP rate however, it remained modestly bullish on the Philippines, with its estimate of a 6 percent growth rate 2012 roughly similar to the “6 to 7 percent” forecast of Economic Planning Secretary Arsenio Balisacan. This indeed is a major improvement from the 3.9 percent in 2011, despite, as in the case of the third quarter, of the low-base effect.

At a 6-percent growth rate though, the government though wouldn’t be able to use its shrill propaganda line that the Philippines is the fastest growing economy in South East Asia—Cambodia and Indonesia are (see table).

BEHIND THE HYPE

GDP Growth Rates for Southeast Asian countries Ranked for highest GDP forecasted for 2013

2012 Q3 2012 forecast
Cambodia N.A. 6.6
Indonesia 6.2 6.3
Philippines 5.7 – 7. 1* 6.0
Malaysia 5.1 5.2
Myanmar 4.5 5.0
Thailand 4.7 4.5

Source: World Bank
*5.7% if statistical discrepancy of 1.4 percentage points is netted out

The World Bank traced economic growth in the third quarter to three major factors:

§ Overseas workers’ remittances, which grew 6 percent, and which is now as big as the value added of our commodity exports.

§ The construction industry, which grew by 25 percent, the fastest pace in nearly two years, contributing a huge 1.9 percentage points to the GDP growth rate figure. The World Bank attributed this to the “rapid growth of the business process outsourcing (BPO) industry and the low interest rate environment” as well as government infrastructure projects. However industry observers have pointed out that a major factor here is the spectacular increase in condominium projects. They warn though that there has been noticeable hard-sell marketing—such as no-downpayment schemes and unbelievable monthly amortizations (P15,000 for a P2-million condominium)—that the real estate market is starting to be a bubble that could suddenly collapse.

§ Government spending, which grew 12 percent, and corrected the Aquino government’s colossal error of putting the brakes on state disbursements last year ostensibly to ferret out corruption.

The World Bank though raised a red warning signal on the economy’s performance in the third quarter: “Investment in durable equipment which accounts for nearly 45 percent of fixed capital formation declined by 2.4 percent pulling down overall investment growth to 8.7 percent from 11.8 percent in the second quarter.” As Economics 101 would tell you: It is investments in capital that determines future growth.

Next week: What happens to the Philippines if the SHTF for the world economy?