As the Times reported this past Thursday, Department of Finance undersecretary and chief economist Gil Beltran was apparently a little offended at a recent report by Standard Chartered Bank, which cast doubt on the government’s “ambitious” economic goal of 7 to 8 percent GDP growth for 2015.
The problem, according to StanChart, is that the BSP has set a low target range of 2 to 4 percent for inflation next year, which automatically introduces a constraint to economic growth. In order to maintain inflation within that range, the central bank will almost certainly have to implement policy controls such as raising benchmark interest rates, which will in turn dampen investment and slow economic growth.
Although StanChart took a slightly different angle with its assessment, it generally agrees with other recent analyses, such as those of HSBC and the World Bank, which have dialed back expectations for the Philippine economy in the near future.
“The StanChart researcher should have looked at recent data to find out the strong negative correlation between GDP growth and inflation,” Beltran retorted, and as though he was lecturing a first-year economics class, added, “In theory, when growth rises, the supply of goods available in the market also rises. This dampens price levels and in turn, reduces interest rates. This is the reason why the lowering of the inflation target should not be seen as negative factor for growth.”
One would assume that an analyst who doesn’t already know that would not be of much use to Standard Chartered, but there is nothing wrong with the assertion. But Beltran wasn’t content to leave it at that, and moved quickly from the realm of the easily-relatable to that of dazzling statistical BS: As evidence to support his counterargument, he pointed out that inflation – as measured by the GDP price deflator – dropped to just 1.9 percent in 2012 and 2013, when GDP growth reached 6.8 and 7.2 percent, respectively.
When I first read that, my instant reaction was: “You have got to be kidding me.”
First of all, the inflation target set by the BSP has nothing to do with the GDP deflator. The target is based instead on headline inflation, the same rate that is announced to the public on a monthly basis and has a direct impact on how far our peso goes.
The GDP deflator, to put it as simply as possible, is the hypothetical price of one “unit” of GDP. Gross domestic product has four basic elements: household consumption, government spending, investment, and net exports. The approximate proportions of these elements in the Philippines’ GDP are 70 percent household consumption, 11 percent government spending, 22 percent investment, and negative 3 percent exports (since the country usually has a trade deficit). Like the consumer price index (CPI) which tells us the headline inflation rate, the GDP deflator measures changes in the values of these elements against some baseline, for the specific purpose of deflating nominal, or current-price GDP into real GDP, in order to be able to compare figures from different years on a common scale. It is useless as a metric of actual inflation, because it includes investment spending (which the CPI does not), and excludes imports (which are a part of the basket of goods that make up the CPI).
Not only is the GDP deflator a misapplied measure to make an argument about the relationship of GDP growth to inflation, there is no way to even use it as a comparative measure, simply because of a difference in scales; the baseline year for GDP prices is the year 2000, while CPI is measured from 2006.
Beltran could have easily made the same point using the familiar CPI figures. As was explained in this paper’s report on Thursday, the full-year headline inflation rates for 2012 and 2013, 3.2 percent and 3.0 percent, respectively, were lower than the 4.6 percent recorded for 2011, when GDP growth was a low 3.6 percent.
Even so, it might be a classic case of confusing correlation for causation, because the data from this year so far is not cooperating; inflation has increased through the second quarter, even though preliminary indicators for that period are showing the economy probably registered GDP growth higher than Q1’s disappointing 5.7 percent.
That may suggest that StanChart’s analysis has a higher probability of being correct than Beltran realizes or wants to admit. Of course, as the Finance Department’s chief economist, being objective in public is likely not part of his job description. Believe it or not, most people who would have an interest in what he has to say in the first place already understand where he’s coming from, and accept it as the normal order of things—which unfortunately makes Beltran’s or any similarly-positioned government spokesman’s job just a little bit harder, because knowing what we should be hearing makes spotting intelligent-sounding gibberish that much easier.