Two quick points on the 3rd quarter GDP results that were released last Monday, showing a somewhat tepid 3.2 percent growth from the previous year:

The first point is that it indicates the integrity of our national income accounts (NIA) and the people in charge of their computation.  By this I mean that the National Statistical Coordination Board (NSCB) truly simply follows what the data and their methodology tell them regardless of how the results reflect on the government and the NSCB itself.  No fudging of the data.  It may be recalled that only recently the NSCB itself, using its leading economic indicators (LEI), projected a stronger third quarter following a weak second quarter (3.1 percent growth).  [It should be mentioned that the NSCB successfully predicted the second quarter slowdown using its LEI, and did so amidst mainly brighter projections from most analysts.]

But the second point is that the NSCB obviously needs to reconsider some of the revisions in the NIA methodology it implemented beginning in the second quarter of this year.  I already discussed this in an earlier article that appeared in BusinessWorld on 10 July,  which is also posted on this site.  By major expenditure category of GDP, value-added growth was fairly high in all except for net exports (NX).  [Recall GDP = C + I + G + NX.] Household consumption (C) grew by 7.1 percent, government expenditure (G) by 9.4 percent, and investment (I) by a hefty 24.5 percent.  But how come little mention has been made of that supposedly hefty investment growth?

I think it is because if one examines the investment component in greater detail, one sees that the great bulk of that investment growth came from the component Change in Inventories.  Minus that component (which would leave only the broad investment category Fixed Capital), then we are left with a much much more modest 0.5 percent growth in investment.  To be sure, even within Fixed Capital, there were some bright spots – Durable Equipment grew by 9.9 percent and Intellectual Property Products grew by 9.4 percent.  But these are eclipsed in terms of their contribution to investment and overall growth by the Change in inventories component.  The graph below illustrates the point.  The accumulation in inventories is almost as high as the rise in household consumption, far exceeded the hike in government expenditure, and was in fact more than the rise in overall GDP –  meaning that minus this component, GDP growth from the expenditure side would be negative.

As I stated in the original article, the problem appears to be that in the revised NIA methodology, much of what used to be statistical discrepancy got transferred to the inventories category.  [In the new methodology, based on the revised GDP data of previous years posted by NSCB in its website, the statistical discrepancy is made to zero out over the year.]  This is unfortunate because it means the Change in inventories has lost its meaning.  When properly measured, this variable, in one context, is usually a good indicator of the optimism or pessimism of the business sector, and in another context, of the onset of a coming recession.

This part of the revision of the NIA methodology if its only aim is to reduce the size of (or even remove) the reported statistical discrepancy may be misguided.  A high discrepancy between the expenditure side and the production side estimates of GDP should exist in the case of the Philippines because of the nature of its economy and inherent limitation of GDP accounting.  We will explore this last point in a subsequent post but it suffices to point out that in national income accounting we have

GNI = GDP + Net Primary Income = C + I + G + NX + NPI.

This is a static model that, to oversimplify it a bit, implicitly assumes that to get GNP, NPI is simply added to GDP after GDP has already been determined.  This is obviously not the real life case.  In the Philippines, net primary income through remittances in fact highly affects GDP through its effect on C, and possibly on I and the other components, which is a good reason, among other well-known reasons, for why production-side and expenditure-side GDP should differ.