Last week, the Philippine Statistics Authority (PSA) announced that the Philippine economy grew by 7.1 percent for the third quarter compared to a 6 percent growth from the same quarter last year.
The growth was also higher than the 7 percent growth registered from the second quarter of this year, indicating accelerating growth momentum. This 7.1 percent gross domestic product (GDP) growth results made the Philippines the fastest growing economy in Asia from July to September of this year.
But how do you really understand GDP? How does the government measure GDP and what are the factors that contribute to the growth of the economy? As an entrepreneur, how do you interpret and analyze GDP data to guide your business and look for opportunities?
Here are the five ways to interpret and apply GDP data in making business decisions:
1. Analyze how growth is measured.
Gross domestic product or GDP is defined as the total value of goods and services produced in the Philippines for a particular time period – quarterly, semi-annually or annually. The value of the total production in the economy is normally measured at current market prices, but to give a fair comparison from one period to another, economists need to remove the effect of changes in prices.
The PSA uses the market prices from year 2000 as the base to reflect a more accurate indicator of the changes in economic output. The 7.1 percent growth was conservatively derived from this computation.
The PSA also publishes GDP data results based on current prices, which show that the economy grew by 9.3 percent last third quarter.
2. Analyze where growth came from.
Economic output can be measured in three ways. One is by adding all the sales production of all sectors. Another is by adding all expenditures by all sectors, private and government. The third one is by adding all the income earned in the economy.
To determine the growth sources by sales production for the third quarter GDP, the services sector which contributes about 59 percent of the economy grew by 6.8 percent. This is followed by industry sector which contributes 33 percent that increase by 8.6 percent. The agricultural sector which contributes only 8 percent also grew by 2.9 percent.
To determine the growth sources from the expenditure side, household consumption which contributes around 68 percent of total increased by 7.3 percent. It will be interesting to see that investment expenditures, which comprises 27 percent, increased by a whopping 20 percent. Government consumption contributes only 10 percent and also grew by 3 percent.
The PSA does not publish growth sources from the income side quarterly. The data are only available on an annual basis.
3. Analyze where the economy is going.
Establishing a trend is important in determining sustainability of economic growth in the near future. Historical trends must provide a sense of stable growth in the economy so entrepreneurs can have reasonable expectations about investing for the future.
GDP data results can be compared to previous periods to see how the economy has performed in the past and where it will probably go in the future. By looking at historical accounts, Philippine GDP quarterly growth has been declining consistently in 2013 from 7.7 percent in the first quarter to 6.5 percent by the last quarter.
The following year, 2014 saw the GDP quarterly growth fluctuating. It started the year with lower 6 percent first quarter growth, then recovered to 6.4 percent in the next quarter, before falling to a 5.3 percent growth in the third quarter. It was a year of adjustments as the economy consolidates for solid growth base.
The Philippine economy bottomed out in the first quarter of 2015 when its growth rate hit a low of 5 percent. From here on, the economy has been consistently moving upwards and never looked back.
4. Analyze where the growth factors are going.
In order to have a better understanding of how the economy can sustain its growth in the future, it will be helpful to review how the sources of growth have performed in the past and how it will support the economy going forward.
On the production side, every major sector can be broken down into key categories to analyze the performance of each subsector. For example, under the industry sector, it can be seen that the manufacturing sector grew by 6.9 percent, higher than the 5.8 percent growth registered in the same period last year. The construction sector also grew by 15 percent, almost double the growth rate from last year.
On the expenditure side, on the other hand, the investments in durable equipment grew by 29.6 percent in the third quarter, higher than the 18 percent growth registered in the same period last year. Government expenditures, however, declined to 3 percent from 15.7 percent last year. It will be easy to say that the growth for the third quarter was driven mostly by private business initiatives.
5. Analyze how economic prosperity has improved.
The standard of living of a country can be measured by computing the GDP per capita income. The higher the income per capita, the more prosperous the country is. GDP per capita is computed by dividing the GDP with the current population.
A growing economy with a rising population may not necessarily be prosperous because the increase in income may be diluted by the increase in number of people sharing the wealth of the economy. How economically prosperous is the average Filipino?
Based on current prices, the average income per capita is around Php 33,641 for the third quarter of this year. This is a 7.5 percent increase from the same period last year. The total number of population this year has risen to 103.5 million from 101.4 million last year.
To remove the effect of price changes, market prices from year 2000 shall be used. At these prices, GDP per capita has increased by 5.3 percent in third quarter this year, higher than 4.4 percent from the same period last year.
GDP per capita can also be used to compare the economic prosperity of the Philippines with other countries. For reference, based on 2015, the Philippines’ GDP per capita is around US$ 2,877. This is roughly about half of the average GDP per capita in India at US$ 6,300. To put this in proper perspective, Qatar has the highest GDP per capita at US$ 145,000 while Somalia has the lowest GDP per capita at US$ 400.
Henry Ong, CMC, is president of Business Sense Financial Advisors. Email Henry for business advice email@example.com or follow him on Twitter, @henryong888.