FOR the second time in two weeks, a research arm of ratings giant Moody’s has made another eye-catching economic forecast, this time predicting a deceleration of growth in emerging market countries in what’s left of 2015.
In a weekly market outlook published on Thursday (March 19), Moody’s Capital Markets Research chief economist John Lonski concluded that growth in emerging market economies will slow from 2014’s 4.5 percent to 4.1 percent this year, a more pessimistic outlook than the consensus estimate of 4.4 percent, and the International Monetary Fund’s downgraded January forecast of 4.3 percent.
The first thing that stands out about this latest forecast from Moody’s is that it reveals what is either a shift in the company’s heretofore optimistic attitude, or a significant divergence of opinions among its different divisions.
The optimism was reflected in the prediction by Moody’s Analytics (a different office) back on March 9 that Philippine manufacturing volume in January expanded by 8.1 percent. That forecast became an instant punchline the next day, when the official figures showed manufacturing volume increasing by a paltry 3.3 percent and manufacturing value actually shrinking by nearly 2 percent.
For a more detailed explanation of what the manufacturing figures actually mean and why Moody’s flubbed a forecast in such a spectacular way, see my March 12 column, “Margin of error.” That earlier column made two basic points: First, that the slowdown in manufacturing activity was further evidence of an economy in which the momentum has definitely shifted downward; and second, that economic predictions in general become less reliable the more specific they attempt to be.
For that reason, I suggested (and still do) that economic forecasts be regarded with a healthy degree of skepticism—and perhaps more in the case of Moody’s in particular, since their manufacturing output prediction was not only not in the same ballpark as the actual figures, it was not even playing the same sport.
Lonski’s prediction of slowing growth might be a little more accurate, however, because he bases it on much broader parameters. According to him, the industrial metals price index hit its lowest mark since June 2010, and is currently running 13 percent below its lagging 52-week average, which to put it in plain terms means global economic activity is ‘slow.’
The correlation makes basic sense; low prices are evidence of low demand, and if demand for industrial metals is low, it follows that industrial activity has slowed down as well. Since emerging economies are the biggest sources of the raw materials if not the industrial metals themselves (the index includes copper, aluminum, iron ore, tin, nickel, zinc, lead, and uranium), they will be adversely affected; the Moody’s report presents some evidence that, over the years, emerging markets’ growth and industrial metal prices have paralleled each other fairly closely.
The degree of the revised forecast – 0.3 percent – may be purely a guess, but the general prediction that growth will decelerate seems highly plausible. Recent indicators like the flat growth of remittances, a moderate contraction (0.5 percent) in exports, and the aforementioned disappointing manufacturing numbers are evidence of it here in the Philippines.
This latest from Moody’s, which again is a departure from the ratings firm’s more positive assessments earlier, is just another part of a muted whipsong being played against the region’s and the country’s economic prospects for the rest of 2015: The narrative that the overall economy, while not objectively bad, is still rather hollow and as a consequence, too sensitive to external influences.
Whether or not that assessment is correct, that it is even being implied by Moody’s is bad news for an administration that was hoping to score another sovereign rating upgrade or two before its term expires. Not having in any way identified the Philippines as an exception to what is seen as a general slowdown in emerging markets, Moody’s is suggesting it will follow the recent decision of Fitch Ratings and stick to its assessment that the Philippine economy is, for now, stable at a sovereign credit rating level one step above junk grade.
When Fitch made that announcement last week, the Administration naturally spun it as a win; it was, they said, an endorsement of the country’s continuing economic strength, and they will say the same thing again when Moody’s makes a similar ratings decision. What it could be taken as, however, is a judgment that the Philippine economy has gone stagnant. Having reached a certain level of stability, the economy has stalled, leaving it more susceptible to outside forces than it should be.
Rhetoric coming from the BSP and the Department of Finance seems to support this view as well, though it would never be admitted in so many words; references to the country being “well-positioned” (because of excessive caution that has racked up huge positive balances in international reserves and national accounts) are made on almost a daily basis. The latest came just yesterday from the BSP, in the form of its “Fourth Quarter Report on Economic and Financial Developments.”
The real message—the one the Administration is not grasping—is that simply holding station at “well-positioned” is not going to cut it; economic growth will continue to fall short of its potential, and if policy doesn’t move in response to changes in the global economy, the ‘good position’ is going to start eroding.
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A closing thought on the passing yesterday of the founder of modern Singapore, Lee Kuan Yew: The world has lost a giant. Whatever your point of view on his pragmatic methodology—LKY will certainly not go down in history as a shining beacon of democratic ideals—leaders who are truly able to create nations are extremely rare. I know there has not been another who has had the same impact in my lifetime, and given the way the political winds blow these days, I suspect there will not be in what’s left of it.