MANILA - The Philippine economy grew slower than expected in the third quarter of the year due mainly to the continued decline in manufacturing.

The National Statistical Coordination Board (NSCB) announced on Thursday that gross domestic product (GDP) grew by a seasonally adjusted 1.0% in July to September from the previous quarter, and by 0.8% from the year-ago period. Both readings were weaker than what the market and government anticipated.

The government had projected third-quarter GDP to rise by 1.6-2.6% from a year earlier, picking up from an initial reading of 1.5% growth in the second quarter.

The second-quarter GDP figure was revised downward to 0.8%, which means third-quarter GDP did not really improve, but was steady.

GDP in the 9 months to September rose 0.7% from a year earlier, below the government's growth target of 0.8-1.8% this year.

NSCB Secretary-General Romulo Virola told reporters: "While some sectors are showing definitive signs of recovery from the global crisis, the domestic economy remains fragile."

Services, which account for more than half of GDP, rose 4.0% year-on-year, while agriculture expanded 1.6%.

Industry contracted 4.4% as the manufacturing sector fell by 7.6%, adversely affecting third-quarter economic growth.

Growth drivers

Nevertheless, Romulo said the economy benefited from trade, finance, mining and quarrying, business process outsourcing, private and government services.

On the demand side, growth came mainly from a modest 4.0% growth in household consumption, fueled largely by remittances from overseas Filipino workers, and a healthy 7.9% growth in government consumption.

The government continued to front-load infrastructure projects and implement social programs under the Economic Resiliency Plan (ERP).

The ERP, along with private sector jobs programs, kept economic growth and employment afloat amid the global recession, which still triggers massive layoffs in several other economies.

Employment in the country as of July grew by a modest 2.6% in the third quarter, albeit lower compared to last year's 3.8%.

Meet 2009 target

National Economic and Development Authority (NEDA) Acting Director-General Augusto Santos said the government remains confident it could meet its growth target of 0.8-1.8% for 2009, with the economy likely to perform better in the current quarter due to Christmas spending.

He admitted though that the higher end of the goal would be difficult to hit.

"We are only confident of hitting the low end," he said.

Dennis Arroyo, head of policy planning at NEDA, said the economy needs to grow by 0.9% in the fourth quarter to meet the low end of the full-year target.

"This can be done, given that the inflation in Q4 (fourth quarter) remains quite tempered, and OFW remittances are strong."

Next year, Santos and Arroyo said the Philippines would continue to post a "slow" and "volatile" recovery, supported by election spending.

Arroyo said past election spending contributed about 0.34% to GDP growth, and the figure could be higher next year, a presidential election year.

Santos, for his part, said: "one possible good news next year is the recovery of the Chinese currency. A stronger yuan means we can sell more to China."

Central bank to keep rates low

Following the release of third-quarter GDP data, analysts said they expect the central bank to keep interest rates low well into 2010.

"It is quite clear the central bank has a growth bias and this number would definitely reinforce that bias," said Euben Paracuelles, an economist at the Royal Bank of Scotland in Singapore.

"They would on stay on hold at least for 2-3 quarters in my view."

The central bank has held the key overnight borrowing rate at a record low of 4.0% since July and analysts had previously said that it is likely to hike rates only in the second quarter of 2010.

But the latest growth data, and the government's acknowledgement that it could only reach the low end of the full-year 2009 GDP growth target, should keep rates on hold for a longer period.

Central bank Governor Amando Tetangco said after the data was announced that the accommodative policy could be maintained.

"Given the within-target range outlook for inflation for 2009 and 2010, the central bank can afford to maintain its current monetary policy stance," he said in a text message to reporters.

Yields on Philippine bonds fell after the data announcement, with the most actively-traded 6-year bond easing to 5.96% from 6% in opening deals. With a report from Reuters