Drags and drivers in 2025
Hardly anyone would disagree that 2025 has been the worst year for our economy since the pandemic-induced collapse in 2020. Let’s look back at the drags and drivers that have led our economy to where we are now.
These forces were both external and internal. This year, external forces were dominant in the nature of drags or impediments to greater economic activity and higher economic growth, measured as growth in gross domestic product, or GDP. One is geopolitical tensions, both close to home (i.e., conflict in the West Philippine Sea, which has impacted capture fishery production and incomes), and further afield, like the Gaza conflict and the Russia-Ukraine war. The latter two have been impacting world trade for years, especially because the nations involved are dominant players in the markets for natural gas, petroleum, and agricultural products, especially wheat, of which Ukraine accounts for up to a 10th of total world exports.
The second prominent external drag is the Trump tariffs, or the sweeping high import duties United States President Donald Trump announced last April, and the associated trade wars he waged against China, Canada, and Mexico. Virtually every other country trading with the US was hit with dramatically hiked tariff rates, which led to wide expectations of a decline, even collapse, in world trade as a result. But contrary to this doomsday scenario, the United Nations Conference on Trade and Development now projects global trade to have grown by 7 percent, and to breach $35 trillion this year for the first time. This indicates that even as US imports (or countries’ exports to the US) indeed declined, trade elsewhere, especially in East Asia, Africa, and South-South trade, actually made up for the US decline.
In the Philippines, the pleasant surprise is that export growth was a driver, and has actually sped up from 2023’s 1.4 percent, to last year’s 3.3 percent, to 6.3 percent this year so far. This is despite the fact that the 20-percent tariff finally imposed on us is no longer lower than (and hence an advantage over) that on our Asean peers, Indonesia, Malaysia, Thailand, and Vietnam (with Vietnam’s initially announced 46 percent subsequently reduced to also 20 percent). Singapore has an even lower rate of 10 percent. The other key factor is that the bulk of our exports to the US, composed of electronics, semiconductors, and machinery, were actually exempted from the hiked tariffs. It’s no surprise, then, that our exports even managed to speed up.
There have been two main internal forces bearing on our economy’s performance this year, namely, the elections and the corruption scandal and the political uncertainty it has created. Normally, the midterm elections this year would have been a boost to our economy’s growth by at least one percentage point, as our experience has been over at least the last 21 years (see “Elections and the economy,” 5/14/13). Average GDP growth in election years from 2004 to 2022 was 6.9 percent, but only 5.6 percent for nonelection years (excluding the outlier years of 2009 and 2020). This election boost comes from hiked spending in the economy due to election campaigns, and the rush on infrastructure construction (prior to the 45-day election ban) to gain favor with voters. But it did not seem to help this year. The suspension of reform legislation in the months preceding the election, as lawmakers were engrossed in the electoral campaign, did not help either. And so, with full-year growth now projected to settle at 5 percent or under, we would be well below the average even for nonelection years.
The telling factor has, of course, been the dramatic cutback in government infrastructure spending in the third quarter (Q3), which sank by double digits (-26.2 percent), following the breakout of the flood control scandal. But even in Q2, government construction already fell by -8.2 percent, reversing the 8.2 percent growth in Q1, which appeared to be driven then by the usual election surge. In recent years, government spending, especially on construction, has indeed shaped the reported overall performance of the economy, whether up or down. The question now arises: Did that spending actually feed durable growth through actual infrastructure development, or did it simply fuel one-off consumption (including of the conspicuous kind)? Unfortunately, our statisticians measuring GDP can only track the spending, but not follow where the money really went.
All told, the good news is that external headwinds did not appreciably affect our economy. The bad news is that internal headwinds dragged us down; we seem to be our own worst enemy. I’ve heard another (humorous) version of the bad news and good news on our economy. The bad news, it said, is: 2025 is worse than 2024. The good news is, 2025 is better than 2026 (Heaven forbid!). God bless the Philippines.
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