Productivity improving but still below 2019 levels — BSP

PRODUCTIVITY growth is improving but remains below pre-pandemic levels, pointing to the need for more effective policy action to encourage rising productivity, the central bank said.

In its latest Monetary Policy Report, the Bangko Sentral ng Pilipinas (BSP) said: “Given the upward trend in the quarterly path of trend TFP growth, the average range of TFP growth recovered to about minus 1.9% to 0.8% in 2022. However, these estimates remain below pre-pandemic values, suggesting the need for more effective policy actions to boost productivity,” the BSP said.  

TFP (total factor productivity) measures residual growth in the total output of a company, industry or economy that is not attributed to traditional inputs such as labor and capital.

The BSP also cited a study which found that slower economic growth in middle-income countries during the 1975-2014 period was linked to declining TFP growth, while capital and labor growth had less impact.

“Thus, examining the recent trends in TFP growth… the key factors driving productivity gains are essential in the development of policies toward robust and sustainable economic growth,” the central bank said.

According to the BSP, Philippine TFP contracted to between minus 4.3% and 0.3% in the 2020-2021 period, at the height of the coronavirus disease 2019 (COVID-19) pandemic.

“The drop in overall productivity reflected the significant decrease in operational capacity of firms when the government implemented strict community quarantine protocols to curb the spread of COVID-19 cases,” it said.  

Due to the mobility restrictions in 2020-2021, business operations declined, workers were laid off, and work hours were reduced in contact-intensive industries.

“The decline in TFP estimates also provides an indication of the extent of economic scarring from the pandemic and the possible depth of long-term economic damage from lost productivity,” the BSP said.

The slowdown in TFP was also mainly driven by the contraction of gross domestic product (GDP) and the drop in stock market capitalization in 2020-2021, the BSP said.

The economy contracted 9.5% in 2020, before bouncing back to 5.7% growth in 2021.

Meanwhile, shares bottomed out on March 19, 2020, with the benchmark Philippine Stock Exchange index dropping 711.95 points or 13.34% to 4,623.42.

In 2022, TFP growth improved amid continued normalization of business activity, resumption of physical classes, and easing of mobility restrictions, the BSP said.  

“Improvements in the industry and services sectors pointed to the strong momentum of economic recovery. At the same time, labor market conditions continued to improve as various economic sectors normalized business operations with the full reopening of the economy,” the BSP said.  

The economy grew by 7.6% in 2022, posting its strongest growth since 1976.

“However, the fall in health and social work spending as well as terms of trade amid higher global oil prices and peso depreciation posed a drag on TFP growth during the year,” it added.

Further improvements in economic activity and trade could help boost productivity moving forward, the BSP said.

“Moving forward, sustained domestic economic growth and labor market improvements could help improve the country’s overall productivity. However, there may be a need to catch up due to lost productivity during the pandemic,” it said.

The government targets 6.5-8% GDP growth between 2023 and 2028. It also aims to reduce the unemployment rate to 4-5% by 2028.

Aside from sustaining growth momentum, the government should also push for wider financial inclusion, accelerate financial innovation, and invest in human capital development to improve productivity.

The BSP noted that government programs to improve human capital, especially education, healthcare, and social work, could also boost the quality of labor and in turn, overall productivity.

The government increased the budget for education, culture, and manpower development by 8% to P865.7 billion in 2023. It also raised the budget for health by 11.6% to P405.3 billion.

“This must be matched by greater spending efficiency,” it added. — Keisha B. Ta-asan