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WORLD AND PHILIPPINE ECONOMICS REPORT

July 31, 2017

THE WEEKLY ECONOMICS REPORT


Contents

National: The Philippine 2018 Proposed Budget Page 2

In Focus: US Crude Oil Price Update Page 3

The East: China’s Industrial Profits Page 5


Japan’s Manufacturing PMI Page 6
Japan’s Inflation and Unemployment Rates Page 6

The West: US Second Quarter Economic Performance Page 7


Business Activity in the Euro Area Page 8

Highlights

 The Philippine 2018 proposed budget amounts to PHP3.7 tn. The budget puts emphasis on the need
for infrastructures and education.
 Industrial profits continue to accelerate as it rose by 22% across all enterprises. Manufacturing
remains steady and profits in the utility sector dropped, but there is a notable increase in the mining
sector.
 Japan’s manufacturing sector sustained its expansion in July. However, there is a noted lack of
momentum and increasingly weaker rate of expansion in the sector.
 Japan’s inflation rate in July is unchanged from the previous month at 0.4%. Unemployment rate is
down to 2.8% while labor force participation rate rose to 61%.
 The US economy advanced by 2.1% in the second quarter of the year. The acceleration is mainly
coming from a stronger investment spending and exports. Government spending barely inched up
while consumer spending marginally slowed down for the period.
 Business activity in the Euro Area remains strong but expansion slowed down for the second
consecutive month. New business in the services sector moderately weakened while the opposite is
true for the manufacturing sector.

Data This Week (July 31– August 6, 2017)

 Philippine Inflation Rate (July)  Euro Area’s Second Quarter Economic


 Philippine Manufacturing PMI (July) Performance
 China’s Manufacturing PMI (July)  Euro Area’s Unemployment (June) and
 Japan’s Industrial Production (June) Inflation Rates (July)
 US Labor Data (July)
 US Foreign Trade (June)
July 31, 2017

The Nation

President Rodrigo Duterte gave his State of the the 2018 proposed budget amounting to PHP3.7
Nation Address this week which put emphasis on tn. This is higher by 12.4% from the 2017 budget
plans rather than accomplishments. At the end of and the following government department and
the SONA, the president submitted to Congress agencies are expected to get the biggest share.

Source: The Department of Budget and Management

Based on the above table from the Department of With the proposed budget and programs, the
Budget and Management, the government golden age of infrastructure and a looming tax
intends to focus on education, infrastructure and reform can potentially reduce government
health. The national security as well as the revenues. It has long been questioned as to
environment is likewise expected to benefit from whether the government can afford more
the increase in budget. Among those mentioned, spending. DBM expects to increase revenues by
the Department of Transportation and the at least PHP1.5 tn by 2020 in order to keep the
Department of Public Works and Highways will deficit to 3% of GDP. The budget deficit is likewise
see their budget rise by more than 30% once expected to increase by approximately PHP100 bn
approved. While the Department of Agriculture, by 2020. Government estimates economic
the Department of Health and Department of growth at 7% to 8% for the next three years based
Interior and Local Government will see a rise by on their priorities and programs. We forecast a
more than 10%. The proposed allocation is in line more conservative estimate of 6% to 7%, driven
with his ten point economic agenda with greater by government spending and investment
emphasis on the need for better infrastructure in spending as well as the manufacturing sector
the country. The president likewise announced based on the industrial classification.
that infrastructure spending would increase from
the original target of 5% by 2022 to 7%.

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July 31, 2017

Sectoral Update

Utilities – Water Food

Metro Manila will see higher water prices Prices of flour-based products are expected to rise
beginning next month as Manila Water and in the coming months as the price of wheat shot
Maynilad, the two concessionaires in the area, up by approximately 50%. The increase is mainly
were granted their respective foreign currency attributed to bad weather condition in the US, the
differential adjustment. For Maynilad, the main source of wheat. As of May, price was up to
increase will be around 0.8% of their average USD5.4/bushel and further increased to
basic charge while Manila Water excluded USD8.1/bushel in July. Price increase is expected
households consuming less than 10 cubic meter to be slow but can reach up to approximately 30%
monthly to the said increase. However, those to 40%. Report is from the Philippine Four Miller’s
consuming more than the given amount will have Association.
to pay an additional 1.12% per cubic meter in the
water bill. Report is from Maynilad and Manila
Water.

In Focus: US Crude Oil Price Update

The year is proving to be less and less predictable it is a question of whether the upward movement
for oil prices as it pivots anew to an uptrend is temporary or will be sustained for the rest of
following a dip in prices the previous months. the year. Factors such as US production and
While price movement has been consistently further supply cut from Non-OPEC nations as well
going down since 2014 – nearly three years ago – as movement in demand and inventories will
the current year movement has moved from a define its general direction in the second half. The
short term rally to a bearish market and current current move to limit Nigeria’s production is just
prices are pointing it back to an uptrend. The what was lacking in the previous announcement
acceleration in US shale production combined leading to a downtrend that began in April.
with the initial refusal from OPEC members to However, it is important to note that in 2016,
curtail supply pushed down prices from above Nigeria’s crude oil production is only USD1.4 mn
USD100 per barrel, to below USD50 by January of per barrel which implies that the current cap is
2015. By the first quarter of 2016, crude oil prices still significantly higher than its contribution the
fell below USD30 per barrel. Speculations on the previous year. For the coming month, prices are
next OPEC move resulted to a rally, raising prices expected to trade at a narrow band of USD49 to
above USD30 - USD40 to USD50 by yearend. The USD50 per barrel with a strong possibility of
table below lists important pivotal events that staying above the USD50 per barrel range
altered the direction of the US Crude Oil Price particularly in the fourth quarter when demand is
Market since the beginning of the year. (See Table highest. Volatilities will continue for the rest of
in the Next Page) the year as a result of uncertainty in terms of
productions cuts and global demand.
Prices are moving up anew as a result of the
agreement in the Joint Committee. At this point,

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July 31, 2017

Month and Year Update General Price Movement

November 2017 OPEC led by Saudi Arabia agreed By the end of November, Crude
to cut daily supply by 1.2 million Oil Price rose to USD49.82, up by
barrels per day (BPD). 15% from the beginning of the
month.

December 2017 Russia, in support of OPEC, Prices remained above USD50 per
promised to cut their supply by barrel, rising by 5% from the
600 million bpd. closing price in November.

February 2017 Before the month ended, Qatar As of this month, prices remained
made an announcement that non- above USD50. By the first two
OPEC nations will not submit to a weeks of March, it has fallen
supply cut to help boost prices. below USD50.

It was also during this time that US Prices briefly recovered back to its
supply from shale production is at USD50 per barrel- price upon
a record high of 1.2 million Kuwait’s support of OPEC supply
barrels. cuts.

April 2017 Saudi Arabia and OPEC announced The announcement triggered a
plans to extend production cuts to downtrend in prices that spilled
the second half of the year. over the months of May and June

May 2017 OPEC officially agreed to extend The agreement sustained the
production cuts. downtrend after a brief moderate
recovery in the second week of
May.

June 2017 There has been news of increasing Price remained below USD50 per
supply from Nigeria and Libya. barrel and has sustained a
downtrend.

July 2017 The Joint OPEC and non-OPEC This rallied prices to USD49 per
Ministerial Monitoring Committee barrel by the end of the month,
agreed to cap/limit Nigeria’s oil still below USD50per barrel, but
production to 1.8 million bpd. No up by as much as 4.19% from the
cap was imposed on Libya. beginning of the month.

Source: The above information are compiled from news articles from BBC, CNBC, Reuters.

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July 31, 2017

The East

China’s Industrial Profits The acceleration in industrial profits, despite a


relatively slower month in June, is indicating a
Industrial profits have been accelerating since the renewed production/business activity. It has
start of the year. From January to June, profits suffered a series of contractions in 2015 while
jumped by 22% year-on-year. This is relatively 2016 recorded a relatively slower advance in
slower than the recorded growth in previous profits. The current trend is a direct result of
months but nonetheless accelerated from the economic reforms in recent years which include
single digit growth rates recorded the previous among others, limitation on debts and a
years. Manufacturing remains steady as it crackdown on bad debts, mergers of state-holding
advanced by 18.5%, nearly unchanged from the enterprises, reduction of steel and coal
previous month. Utilities sector, on the other production. China’s economy remains weaker
hand, continue to see dropping profits as it fell by than the previous years but the government
28.2% for the given period. But the acceleration believes that the reforms and the current
in the mining sector by more than ten times its economic growth has more substance and value
value the previous year sufficiently offsets the added than the double digit growth of previous
dropping profits in the utilities sector. By years. Economic growth for the year is expected
enterprise, state-holding enterprises are seeing to remain closer to the upper limit of the 6.5% to
renewed business as profits rose by 45.8% while 7% target.
profits from private enterprises likewise
accelerated by 14.8%.

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July 31, 2017

Japan’s Manufacturing PMI Business activity in the sector has directly


benefited from the stimulus package the previous
Japan’s manufacturing sector sustained its year. While the indices are relatively stronger, the
expansion in July but at a slower rate than the expansion has been increasingly getting weaker as
previous month. The output index is down by 0.8 September approaches. By the fourth quarter
points to 51.4 while new business is likewise (when the impact of the stimulus first manifested)
weaker than the June expansion. New export the actual effect of the stimulus and its
orders likewise sustained its expansion but the sustainability will be tested. The increasingly
index is unchanged from the previous month. weaker performance is so far pointing to a lack of
Meanwhile both input and output prices indicate sustained growth momentum.
a weaker rise for the given period.

Japan’s Inflation and Unemployment the deflation in gas prices the previous months.
Inflation in other commodities showed little to no
Japan’s inflation remains weak and unchanged in change from the June rates. Meanwhile,
June at 0.4%. Food prices rose by 0.8%, also unemployment rate returned to 2.8% in June
unchanged from the previous month. On the following a brief rise to 3.1% in May. Labor force
other hand, prices of utilities rose at a faster rate participation likewise improved to 61% for the
of 3.5% for the given period following the period, the highest recorded in nine years.
acceleration in electricity prices and a reversal of

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Japan’s inflation remains below target despite the nation that battled sharp contraction in prices for
aggressive stimulus that began the previous year. years. The improvement in the labor data can
There are neither further indications nor hardly be attributed to an improving economy as
movement that will point to a significant rise in Japan faces demographic challenges with an aging
the coming months. Deflation is not likely for the population.

The West

US Second Quarter Economic Performance strongest performance since 2015. On the other
hand, exports recorded its strongest performance
The US economy advanced by 2.1% in the second yet since 2014 as it advanced by 3.4%. However,
quarter of the year from the same quarter the imports rose at a faster rate of 4.2% compared to
previous year. Consumer spending recorded a exports.
relatively slower growth of 2.6%, the weakest
recorded in a year. Government spending The US economy slowed down in 2016, with
remains weak but reversed the contraction of the growth rate for the full year at only 1.5%. While
previous quarter to a mild growth rate of 0.2%. the current year is showing some improvements
The moderate acceleration in the economy is in growth, it remains below the target of 3% and
mainly coming from both exports and investment the economic performance of 2014 and 2015.
spending. The latter advanced by 2.9%, its The acceleration in investment spending is

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July 31, 2017

attributed mainly to the lower base the previous potential for growth that will come from
year as the election season often limits the latter. government spending. Barely inching up in the
While the jump in exports is a good indicator of a second quarter following a contraction in the first,
growing demand from abroad, the rise in imports an acceleration in government spending in the
is pointing to a renewed domestic demand. second half of the year can boost the economy
However, the appreciation of the currency would closer to target. However, assuming the status
likewise make import more competitive in the quo, growth forecast remains at 1.8% to 2.2% for
domestic market resulting to its acceleration. It the full year.
should likewise be noted that there is a great

Euro Area Business Activity sustained its momentum. Inflationary pressure,


on the other hand, has weakened following a
Business activity in the Euro Area remains strong weaker movement in both input and output
in July but expansion has been slowing down for prices.
the second consecutive month. The composite
PMI is presently at 55.8, slightly lower than the Despite a relatively weaker performance, business
56.3 recorded the previous month. The services activity in the Euro Area remains strong. There are
PMI is unchanged at 55.4 while the manufacturing no indications that a contraction is on the horizon
PMI dipped to 56.8 but remains nonetheless but as previously forecasted, expansion will
strong. Services recorded a weaker expansion of remain stagnant. Some acceleration is expected
new business in contrast to manufacturing that in the second quarter as far as new business from

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abroad is concerned while prices will pick up pace growth forecast remains below 2% and within the
as global fuel price move up anew. Economic narrow range of 1.7% to 1.9%.

This publication and the contents hereof are intended for information purposes of selected individuals only,
and may be subject to change without further notice. The information contained in this report should not be
taken in substitution for the exercise of judgment by the addressees, who should obtain separate tax, legal or
financial advice. The information herein has been obtained from sources we believe to be reliable. Neither
PNB Securities, Inc. (PNBSI) nor its affiliates nor any of its directors and employees, represent nor warrant the
accuracy or completeness of the contents hereof or as to the existence of other facts which might be
significant, and will not accept any responsibility or liability or whatsoever for any use of or reliance upon this
publication or any of the contents hereof. Neither this publication, nor the contents hereof, constitute or are
to be construed as an offer or solicitation of an offer to buy or sell securities. Any recommendation
contained in this document does not have regard to the specific investment objectives, financial situation and
the particular needs of any specific addressee and may also not necessarily reflect those of PNBSI's opinion or
advice. PNBSI may have positions or may be materially interested in any of the securities mentioned in this
document.

PNBSI is a wholly-owned subsidiary of Philippine National Bank (PNB). The analysis, valuations, forecasts and
recommendations made on PNB in this report are from independent research and do not express the views
and opinions of PNB.

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July 31, 2017

Philippine and World Economic Data and Forecasts


December 2018F 2017F 2016 2015 2014 2013 2012
Philippines
GNI (PHP mn, Constant '00 Prices) 10,930,597 10,311,218 9,735,210 9,134,738 8,633,032 8,168,768 7,496,546
GNI Growth 6.0% 5.9% 6.6% 5.8% 5.7% 9.0% 6.5%
Remittances (PHP mn, Cons '00
Prices) 1,754,358 1,695,032 1,622,040 1,540,910 1,462,747 1,418,689 1,184,875
Remittances Growth 3.5% 4.5% 5.0% 5.3% 3.1% 19.7% 4.8%
GDP (PHP mn, Constant '00 Prices) 9,176,239 8,616,187 8,113,170 7,593,828 7,170,285 6,750,079 6,311,671
GDP Growth 6.5% 6.2% 6.8% 5.9% 6.2% 6.9% 6.8%
Agricultural Industry (PHP mn,
Constant '00 Prices) 752,969 740,212 710,590 719,748 718,778 706,586 698,937
Agricultural Industry Growth 1.7% 4.2% -1.3% 0.1% 1.7% 1.1% 2.8%
Services Industry (PHP mn, Constant
'00 Prices) 5,310,488 4,968,074 4,664,261 4,338,284 4,060,319 3,824,369 3,590,111
Services Industry Growth 6.9% 6.5% 7.5% 6.8% 6.2% 6.5% 7.6%
Industry (PHP mn, Constant '00
Prices) 3,112,782 2,907,900 2,738,320 2,535,796 2,391,188 2,219,124 2,022,623
Industry Growth 7.0% 6.2% 8.0% 6.0% 7.8% 9.7% 6.8%
Household Consumption Expenditure
(PHP mn, Constant '00 Prices) 6,289,795 5,925,101 5,628,318 5,264,137 4,952,191 4,692,438 4,442,523
Imports (FOB in USD mn) 74,688 69,567 81,159 71,067 65,398 62,411 61,129
Exports (FOB in USD mn) 62,882 59,044 56,232 58,827 62,102 56,698 52,100
Total Trade (FOB in USD mn) 137,569 128,611 137,391 129,894 127,500 119,109 113,229
Balance of Trade (FOB in USD mn) (11,806) (10,523) (24,927) (12,240) (3,296) (5,713) (9,029)
91 Day T-bill Rate 1.22% 1.28% 1.50% 1.77% 1.24% 0.32% 1.58%
Bank Average Lending Rates 5.94% 6.07% 5.64% 5.58% 5.53% 5.76% 5.65%
Inflation Rate (2006 Base Year) 3.20% 3.80% 1.80% 1.40% 4.10% 3.00% 3.20%
Forex Rate (PHP:USD1) 50.00 51.00 49.82 47.23 44.69 44.10 41.01
Commodity Prices
Ave Gold (Au) Price USD per oz 1,179.02 1,214.35 1,250.74 1,160.06 1,266.40 1,411.23 1,668.98
Ave Silver (Ag) Price USD per oz 23.78 20.19 17.14 15.68 19.08 23.79 31.15
Ave Copper (Cu) Price USD per lb 3.21 2.66 2.20 2.51 3.12 3.34 3.61
Ave Nickel Price (USD/lb) 5.29 4.80 4.35 5.38 7.64 6.74 7.95
Ave Dubai Crude USD per Barrel 49.10 45.00 41.24 51.23 96.66 105.43 108.90
The Global Economy
US GDP Growth 2.37% 2.50% 2.40% 2.43% 2.43% 1.49% 2.22%
UK GDP Growth 2.21% 2.22% 1.89% 2.25% 2.85% 2.16% 1.18%
France GDP Growth 1.49% 1.29% 1.14% 1.14% 0.18% 0.66% 0.18%
Germany GDP Growth 1.36% 1.62% 1.46% 1.45% 1.58% 0.41% 0.61%
China GDP Growth 6.00% 6.20% 6.49% 6.90% 7.30% 7.70% 7.70%
India GDP GDP Growth 7.60% 7.49% 7.45% 7.34% 7.24% 6.64% 5.62%
World GDP Growth Constant Prices 4.96% 4.74% 4.54% 3.97% 4.64% 4.13% 3.55%
Notes: Forecasts from Corpecon Research; the world and other countries’ forecasts and historical data are from
economywatch.com; Historical data from NSCB, BSP, OANDA, and indexmundi.com

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