Philippine 2Q GDP data indicative of further tightening

Also of solid manufacturing sector performance.

The Philippines’ headline GDP growth accelerated to 6.4% YoY in 2Q14, up sharply from a revised 5.6% in 1Q14, bringing overall GDP growth to 6.0% in 1H14.

According to a research note from DBS, while the headline GDP print in 2Q14 is well above its forecast of 5.5%, on sequential terms, it was within DBS’ expectations. The economy is now growing circa 6% QoQ, saar once again after the temporary slip in 1Q14.

The report said that as expected, private consumption remains resilient, with the big difference this time being external demand, boosted by a strong performance in manufacturing exports in the period.

Here’s more from DBS:

The manufacturing sector led the rebound across all industries, by penciling in another double-digit growth. A sustained strength in export growth will be crucial if GDP growth were to reach the upper half of the 6-7% range for 2014.

It is important to note that GDP growth came in strong in 2Q14, despite a marked slowdown in government spending in April and May.

Fiscal spending was flat in 2Q14, creating a drag in the construction sector. While private investment growth was pretty much steady in 2Q14, public investment growth has now eased to a 10-15% pace, from as high as 25-30% in 2013.

Not that the Bangko Sentral ng Pilipinas (BSP) will be too concerned though. The government is likely to accelerate its fiscal spending towards the year-end, despite some hiccups in April and May amidst controversies regarding the government’s pump-priming programs.

And in any case, the BSP may indeed prefer some moderation in public construction spending, which has contributed to the sustained increase in liquidity in the financial system.

Look for the BSP to tighten its monetary policy further. Our call is still for another 25bps rate hike in the upcoming policy meeting.

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