• Economia Nervosa

    Ben D. Kritz

    Ben D. Kritz

    At about 3 o’clock every afternoon I am handed a list of what will be the business news headlines in the next morning’s papers, and about a month ago (on September 12, to be precise) I noticed the beginning of what has turned into a trend.

    On that day, the BSP released the results of the Consumer Expectations Survey (CES) for the third quarter, a 21-page report with the following title: “Consumer Confidence Edges Lower in Q3 2014 But Remains Buoyant for the Year Ahead,” which was exactly how the item on my news advisory list was written.

    Following up the tip and actually reading the report, however, quickly revealed that whoever is responsible for crafting the public releases at the BSP had adopted rather generous definitions of terms like “edges” and “buoyant.” The overall Confidence Index (the difference between the number of CES respondents with optimistic and pessimistic outlooks) did not “edge lower,” it took a dive; the current-quarter outlook, which was already negative at -17.3 percent in Q2, dropped another nine points to -26.3 percent in Q3. And while consumer impressions of the prospects for the next 12 months were still positive, sinking more than six points to 9.7 percent from an already anemic level of 15.9 percent the previous quarter is hardly something anyone else would describe as “buoyant.”

    To put the “buoyant” CI figure into some kind of realistic perspective, when the September CI in the US was announced as being 7.4 points lower than its August figure, financial markets were thrown into a near-panic, dragging global markets lower for a day or two as a result. And that was because of a difference between a CI of 93.4 in August and 86.0 in September, figures which are rather a bit higher than the Philippines’ “buoyant” indicators.

    Since then, government agencies seem to have been exercising an increasing amount of “spin” to present routine reports on economic performance, because the indicators are in an apparent state of decline. The stories from this past Friday provide some good examples. Exports increased year-on-year in August by 10.5 percent, but one had to read several paragraphs of the release to find that the increase was actually nearly two percentage points slower than in July, and that the Philippines year-to-date growth of 9.2 percent now trails both Vietnam and Indonesia—even after the latter recently imposed an export ban on one of its biggest products, mineral ores.

    In a release that announced manufacturing output for August had increased by 7.5 percent, the Philippine Statistical Authority (PSA) was obliged to note this was well below the revised year-earlier figure of 17.5 percent and the month-earlier figure of 8.1 percent, but devoted the bulk of its report to highlighting growth in individual sectors and rates of factory utilization. No mention was made of the August figure’s being well below the 11 percent estimate that had been made just a week earlier and dutifully repeated by Moody’s Analytics.

    Finally, there was the report about foreign direct investment flows, which were positive at $436 million in July (an amount that Thailand nets in a little over a week, on average), but were the lowest net since March of this year, and were about $123 million less than the net inflow in July 2013. The headline on this particular information release was, “Foreign direct investments (FDI) continued to post net inflows for the 13th consecutive month in July,” which is actually not true, as there was a net outflow in May and June of last year.

    The economic indicators are not bad, but they are not as good as they were in the recent past, and the manner in which they are being disclosed by the responsible agencies betrays a certain uneasiness about the direction things are taking. Even things that have not happened yet are being preemptively spun in a positive direction; last Thursday, prompted by absolutely no one, Department of Finance Economist and incurable optimist Gil Beltran announced that, “The economy successfully reversed inflationary expectations through a decisive reduction in food inflation in September,” and that “this favorable development may enable the BSP to avoid further tightening in its monetary policy.”

    That would be great news, except that the general consensus among everyone who is not Gil Beltran—including the BSP, if their cautiously noncommittal statement accompanying the release of the September inflation rate the day before Beltran’s comments is any indication—is that upward inflationary pressures have perhaps diminished slightly, but have not dissipated.

    The long and the short of it is that economic activity is slowing, and because this economy is driven by consumer spending, that means consumer spending is slowing. One indicator of that is the quarter-to-quarter growth of the household final consumption expenditure (HFCE) component of the GDP. At current prices, that factor expanded by 5.4 percent from Q1 to Q2 this year, which was a little better than the same period last year, when the quarterly growth was 5.2 percent. The big difference is inflation in the second quarter of last year was 2.7 percent; in Q2 this year, it was 4.3. Net out inflation from the growth rate, and the expansion of consumer spending this year so far is less than half of what it was at the same time last year.

    The most likely effect from it, if the slowdown in consumer spending continues, is that heavily-leveraged businesses will find themselves overextended. The conditions are ripe for it; credit growth has accelerated while GDP growth has slackened its pace, pushing the credit-to-GDP gap well over the safe threshold of 10 percent, and the corporate sector’s median debt-to-EBITDA ratio and median revenue growth trends are likewise moving farther apart. The longer all these conditions continue, the more sensitive the economic environment is—the magnitude of the change in spending levels, credit availability, or external factors needed to topple the shaky economic edifice and bring on a recession becomes progressively smaller.

    The solution to prevent it from happening is simple enough in the abstract: The government simply needs to stop creating an atmosphere of uncertainty and instability that discourages consumer activity. Given the personalities to whom that responsibility falls, the possibility of that actually happening, unfortunately, seems rather remote.



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    1. While I doubt the executive departments have enough influence on consumer spendung to avert a future recession, I agree with the main point that trying to spin the data does not help.

      As this piece was billed as a follow up to last Friday’s column “Back to the Bubble,” part of that column’s last sentence bears repeating:

      “the risk of the real estate sector being a real source of trouble for the Philippines appears to be increasing”

      The BSP, with a greater influence on macroeconomic outcomes, faces a dilemma of how far to let the boom times ride against the risk of overheating, complicated by outisde forces. As Gov Tetangco has noted, our country is not in a position to forego a chance at substantial growth. I for one am glad the boom is in buildings and not tulips. Recession victims can’t live in foreclosed tulips.

    2. Carl Cid Inting on

      While it is true that economic booms are usually followed by economic busts, the Aquino administration got deluded by its own propaganda and tried to make everyone believe that good times would last throughout Aquino’s term. In reality, Aquino only latched on to the growth narrative that had already begun under the previous administration, thanks to global monetary easing which flooded the world with cheap credit and easy money. Every businessman and economist worth his salt knew that central banks throughout the world would not be printing cheap money forever, and that the flood of liquidity would have to end. Now the chickens will be coming home to roost, and Aquino’s hype and propaganda will backfire on him.

    3. Throughout history, boom and bust have always come together like inseparable siamese twins. Economists almost never run out of ideas about how to produce growth ( the boom part ) but are totally clueless about the contraction that always follows. Nothing can be done about the coming bust, not even if you change the entire government with economic nobel prize winners. Fasten your seat belts.

    4. PNoy’s incompetence and the wrong-for-the-economy inaction and bad decisions of the administration are all part of the Liberal Party mafia dons’ plan to end up taking total control of our country, Mr. Ben Kritz.
      Thanks for your great economic and fiscal analyses. Sorry to point out something political, which is a life-and-death matter for Philippine democracy and our Republic.