Notes on Projections of Economic Recession and Government Responses
15 July 2009
In its July 2009 update of its outlook for the Philippines, the World Bank declared that the country is headed for a 0.5% economic contraction this year, an “outright recession” – contradicting the government’s fairly optimistic projection of modest but positive 0.8% to1.8% growth. The World Bank added that the government’s stimulus efforts would not be enough to revitalize the economy, thus bringing us into recession together with Malaysia and Thailand.
That the World Bank itself points to a recession should not already come as a surprise to the government. After all, the National Statistical Coordination Board (NSCB) which happens to fall under the National Economic and Development Authority (NEDA) already pointed this out two months ago, after announcing the lackluster, virtually flat 0.4% “growth” in GDP in the first quarter of the year.
This is probably an overestimation, as FDC already pointed out, that the government may be having difficulty in producing accurate statistics on economic performance (See: Foreign debt fell? Or, another spin from Gloria’s fabrication machine?
). For example, the 4.5% GDP growth in the fourth quarter of 2008 that was announced with much fanfare in end-January 2009 was revised downward to 2.8% without as much as a peep a few months later in May. Nonetheless, the fact that the first quarter 2009 “growth” is a 10-year low should already be enough to shatter the picture of a resilient economy. The blind optimism of “boomsayers” will explode in their faces as the government's failed economic paradigm unravels itself in the months to come.
But the question begs to be raised: What statistical sorcery will they employ this time?Better or worse in second quarter?
NEDA expectedly responded to the NSCB warning that the economy is in the brink of a recession, by rejecting all forecasts of an “economic contraction” – which puts our economic managers at odds with the opinion of one of the country’s more influential creditors. They insist that the “modest growth” in the first quarter “should not be seen as an indicator of how the next three quarters would happen, because the first quarter was a quarter of uncertainty, a quarter of gloom, and because, really, in the late part of April, positive signs were showing up.”
But even if there seems to be dissonance among government agencies, the assertion of the country’s “resiliency triumphing over recession” being challenged by the government’s main statistical bureau itself, the country’s much-hyped resiliency – which technocrats tell us is caused by our “strong economic fundamentals” – is dubious to say the least. The depressing drop of the Leading Economic Indicator (LEI) for four consecutive quarters, even “breaching into the negative territory” at -0.195 in the second quarter of 2009 from +0.045 in the first quarter of 2009 reveals a picture in stark contrast to the earlier government pronouncements.
Table 1. Some Contributors in the Leading Economic Indicator (LEI), Some Components of Gross Domestic Product (GDP) (at current prices) as share of Expenditures. Source: National Statistical Coordination Board (NSCB).
|Some Contributors in the Leading Economic Indicator (LEI) ||Some Components of Gross Domestic Product (GDP) |
(at current prices)
|Contributor ||Q1 ||Q2 ||Expenditure Share ||Q1 2009 ||Q1 2008 ||Growth from Q1 2008 |
|Consumer Price Index ||-0.585 ||0.429 ||Personal Consumption Expenditure ||1,268,233 ||1,164,463 ||8.90% |
|Terms of trade index ||-0.002 ||-0.185 ||Exports ||528,623 ||648,252 ||-18.50% |
|Total merchandise imports ||-0.008 ||-1.006 ||Less : Imports ||530,951 ||676,591 ||-21.50% |
|Number of new businesses ||-0.197 ||-0.118 ||Capital Formation ||252,561 ||253,172 ||-0.20% |
Simply put, the LEI are indicators the movement of which gives us strong clues as to where the economy is heading. LEI are important for investors as they help predict what the economy will be like in the future. Stock market returns, for example, are a leading indicator, as the stock market tends to decline ahead of the economy and improves before the economy begins to recover. The NSCB collects data for 11 identified leading economic indicators, namely: (1) consumer price index, (2) electric energy consumption; (3) exchange rate, (4) hotel occupancy rate, (5) money supply; (6) number of new business incorporations, (7) stock price index, (8) terms of trade index, (9) total merchandise imports, (10) tourist arrivals, and (11) wholesale price index. It then generates the Composite Leading Economic Indicator on a quarterly basis.
During the 2009 first quarter LEI, among the negative contributors in the LEI are: number of new businesses (-0.197 contribution) and stock price index (-1.077), total merchandise imports (-0.008), and terms of trade index (-0.002). Interestingly, they roughly correspond to the 1st quarter GDP decline (at current prices, which is more appropriate to use in monitoring expenditure side) in capital formation (-0.2%), imports (-21.5%, which may be a good thing, if we really are substituting import with domestic products), and exports (-18.5%). This is when LEI is 0.045.
So, if we have LEI that is +0.045 when GDP growth is at 0.4% growth, how would the GDP fare with LEI of -0.195? Probably less than the miniscule growth, and probably negative. This is considering that the Bangko Sentral ng Pilipinas (BSP) itself reported that the Balance of Payments (BoP) position, which roughly summarizes all international economic transactions, fell from a surplus of $1.735 billion in January to a deficit of $55 billion in May – $97 billion less than May last year. In fact, former DBM Secretary Benjamin Diokno already put it glumly, and cited a host of reasons why we should expect a contraction instead of growth: “The second quarter is practically over. The early rain, the swine flu scare, and the stock market correction have to be factored in the second quarter growth calculus.”Personal consumption to drive 2nd quarter growth?
Still, it can be argued that the strongest leg of Philippine GDP – Personal Consumption Expenditure (PCE), which as of 1st quarter 2009 is pegged at 72.89% of GDP in nominal terms – would remain strong amid the crisis. Our economic managers are perhaps hoping that because inflation eased, resulting in CPI becoming a positive contributor (0.429) to the LEI 2nd quarter (from a negative contributor (-0.585) in the 1st quarter), PCE may also grow. They may also pray that this hoped for growth would offset the decline in other spending such as investments and foreign (export) spending. This ignores the fact that from 1st quarter 2008 to 1st quarter 2009, PCE’s nominal value grew by 8.91% – a slowdown from the previous year’s comparative increase of 11.06%.
Then again, two things are needed for PCE to grow: consumer confidence and the ability to consume. The BSP in its survey reports that consumer confidence declined moderately in the 2nd quarter 2009, with the overall confidence index (CI) pegged at -34.2%, lower by 8.5 index points from Q1 2009. The BSP attributed this weaker consumer outlook to the “softening labor market and lower family income due to the recessionary conditions in the global economy”.
With regard to the ability to consume, the government flaunts that our remittance inflow will continue to be strong. On this, the recent assessment by the global rating agency Standard &Poor’s (S&P) which shows that OFW remittances will continue to grow was quoted by government officials. This is important to consider because remittances directly impact on income, and thus consumption, of households. A 2004 ADB study on remittances of Southeast Asia workers reveals that at the household level remittance income constituted, on the average, about 80% of the beneficiary household’s total income, and for the families that receive remittances, Aubrey Tabuga of Philippine Institute for Development Studies (PIDS) found that they devote more income on consumption goods and invest more on education, health care, and housing.
But the pronouncement of a strong remittance inflow is contradicted by BSP itself, reporting that remittances from US-based Filipinos is pegged $2.286 billion from January to April 2009, 10.43%% lower than the $2.552 billion reported last year. This is significant considering the fact that 41.58% of remittance inflow during this period is from the US. A slowdown in remittances may mean slowdown in consumption, as households either decide to save more for the hard times, or hold back spending for more important expenditures like healthcare and education, especially since these public goods are not provided well by the government.
And assuming without conceding that remittance may actually grow, the families who receive cash and other assistance from abroad are a minority in this country. According to the Philippine Migration and Development Statistical Almanac (December 2008), based on data from the government's Family Income and Expenditures Survey (FIES) in 2006, 1.6 million households out of a total 17.4 million households received cash, gifts and other forms of assistance from abroad. Only 9.2% of all families depend on remittances. Of the total 1.6 million families that receive cash and other assistance from abroad, 85.4% belong to the two highest income classes, with annual earnings of at least PhP100,000. In stark contrast, only 0.1% of families receiving cash and other assistance from abroad are from the lowest income class earning less than PhP20,000 a year.
And what about the overwhelming 91.8% of Filipino families which aren’t directly dependent on remittances, simply because none of them are working abroad (for reasons ranging from inability to shoulder upfront costs of sending a family member abroad, or lack of access to education or skills development to qualify for an overseas job, etc.)? For them, higher prices, rising underemployment and unemployment amid industrial contraction (during the first quarter, employment in the Agriculture, Fishery and Forestry sector and the Industrial sector contracted by 1.0% and 6.6%, respectively ) will erode their ability to consume.
The conclusion is clear: without decent jobs and job security, and amid rising prices – for even with inflation falling prices still continue to rise – we expect personal consumption spending to weaken this year. Without the government strategically addressing the roots of this problem, we may eventually find the strongest leg of the economy broken by the global recession.The trick: government expenditure
But maybe Malacañang has tricks up its sleeve, and this is where Government Consumption Expenditure (GCE) – pegged at about 9.6% of GDP in nominal terms in the first quarter of 2009 – comes into play. Comparing the first quarter of 2009 with the same period last year, GCE posted a real growth of only 6.3%, despite the “Economic Resiliency Program (ERP)” which is intended to spur growth amid the crisis. Compared with the first quarter of 2008, the share of nominal GCE to nominal GDP grew by only one percentile point (from 9.5% in Q1 2008).
Rather than spend for economic resiliency in the first quarter, the government of Mrs. Arroyo actually undertook “expenditure compression.” The Bureau of Treasury (BTr) reveals that actual spending (P355 billion) for the first quarter is P6.8 billion lower than the programmed (P361.9 billion), with actual cash expenditures being as much as P9.1 billion lower than programmed. Of this spending, 29.9% or P106.32 billion went to interest payments for debts alone, leaving the other sectors scrambling for their share of the pie (Allotment to LGUs, for example is pegged only at 17.6%).
But the programmed amount alone already fell. The government actually programmed P1.489 trillion in expenditures this year, lower than the original PhP1.495 trillion because of a reduction in the country’s economic growth target. This explains why NSCB Secretary General Romulo Virola concluded that the planned pump-priming failed to materialize, resulting in a 10-year low real GDP growth of 0.4% in the first quarter.
The lack of government stimulus during a time of crisis is incredibly short-sighted. In the first quarter without tangible pump-priming, Capital Formation, Imports, and Exports fell by 5.7%, 19.2%, and 18.2%, respectively, while Agriculture, Fishery and Forestry sector and the Industrial sector contracted by 1.0% and 6.6%, respectively. Because the government appears to be holding back its spending, the P330-billion Economic Resiliency Plan (ERP) notwithstanding, the economy is forced to rely on the private sector to drive growth and fight against recession. The private sector, however, is less inclined to spend considering the uncertainties surrounding a deep and pervasive global crisis. Conclusion: government’s underspending = worsening economy
The government is the economic actor that should take the risks and work to stimulate the economy. Following the principle of subsidiarity, the government should move in when the private sector fails to induce development and increase social welfare – and with statistics for personal consumption spending and capital formation falling, the government should have acted swiftly and strongly to avert contraction. In this respect, as the first quarter GDP data show, the Arroyo government failed dismally, showing a lack of foresight and blinded vision by not spending high enough.
Much is at stake. It doesn’t take much thinking to see that such a policy of minimal intervention and lack of spending would bring the economy into the worst kind of crisis. There will come a point that counter-cyclical measures such as stimulus programs and the yet-to-be-seen ERP can no longer counteract positive feedback cycles of recession due to unmitigated structural effects. By the time spending and other institutional response happen and take effect, irreversible damage to the industrial sector and the economy's capacity to generate employment may have already severely compromised the country’s chance for recovery.
We are talking about the failed industries and their displaced workers. Without the government rescuing critical industries (like the Keppel Cebu Shipyard) and preventing massive retrenchments (like those in Export Processing Zones), we may end up having our already scanty industrial base, which is to serve as a platform for future employment, further reduced. We may also find a portion of labor force rendered unable to return to work due to harsh social conditions. But more than assisting critical industries, we need a paradigm shift that builds local economies, provides decent jobs and sustainable livelihoods for everyone especially the poor, protects women, children and the socially displaced, and develops the nation towards greater social equity.
The government may either turn a blind eye and head towards economic disaster while trying to avoid, by its lender-biased standards, a “debt crisis” combined with a “fiscal crisis.” A distant possibility is that it uses the ongoing recession as a platform for more radical policy transformations in public finance and the macroeconomy, serving more strategic developmental objectives. A business as usual stance typified by the President's boomsayers will bring us nowhere but down.
This is how Mrs. Arroyo's place in history will be sealed.