BECAUSE the economy, as a discussion topic, is actually quite boring on a day-to-day basis, and because economists are for the most part boring and unimaginative people (my idea of a good time is watching Russian dash-cam videos on YouTube, for example), we tend to be easily distracted by shiny things. This week’s shiny thing is a concept called the “dollar recession,” and some of us seem to think it’s a problem. On closer inspection, it turns out it probably is.
A “dollar recession” occurs when an economy retracts in dollar terms for at least two consecutive quarters. It is the sort of concept that is ordinarily only considered interesting by the apocalyptic fringe, like the people who write for ZeroHedge under assumed names, but when someone as mainstream as Fitch’s global head of sovereign ratings James McCormack weighs in on the subject, as he did in a guest article for the Financial Times just before the Easter holiday, it may be worth a closer look.
McCormack feels the world economy, particular emerging market economies, may be in for a rough ride this year. “Fitch estimates that dollar GDP for the 30 biggest emerging market economies contracted by 6.6 percent in 2015,” he wrote. “Our latest GDP and exchange rate forecasts suggest that dollar income will fall again in 2016, and the combined two-year decline will be slightly larger than that of 1998-1999. The current episode is also broader than 1998-1999, with dollar GDP falling in 23 of the 30 largest EMs last year, compared to 16 in 1998.”
McCormack does point out that 2016 appears to be starting off better than 2015 ended for the most emerging market economies, but at least two of the three underlying problems that cause a dollar recession—a strong dollar, low commodity prices, and GDP contraction in local currency terms—are beyond the control of emerging market policymakers and are not improving very quickly. As a result, the outlook is that the dollar recession will continue for most of this year at least, and may extend into 2017 in some places.
The relevance of GDP expressed in dollar terms is that it permits direct comparisons between economies denominated in different currencies in current price terms, which in turn eliminates the margin of error that creeps into calculations of real GDP or purchasing power parity. From a practical standpoint, dollar GDP is significant in making assessments of an economy’s trade strength. The degree of difference between dollar and local currency GDP growth rates also provides a general indicator of the balance between trade and domestic consumption as drivers of the economy.
According to Fitch’s McCormack, “It is critical to consider nominal dollar incomes in assessing countries’ relative economic performance and prospects because the dollar continues to dominate the pricing of global commodities, the settlement of international trade, the extension of cross-border credit and the foreign reserve assets held by emerging market central banks. Although the international roles of several other currencies, including the Chinese renminbi, are expanding, there is no convincing evidence that the dollar’s supremacy is under any immediate threat.”
The Philippines is technically not in a dollar recession according to the standard two quarters’ of retraction definition, but it is very close. Q4 2015, when the economy shrank by 0.5 percent in dollar terms, followed a quarter in which the economy basically went nowhere, expanding by just 0.06 percent; Q4 also marked the fifth straight quarter of growth deceleration (see chart).
Indications are that it probably won’t fall into dollar recession this quarter, given the amount of money being shoved through the gloryhole of the election campaign; while the longer-term value of that is debatable, it does at least add considerable volume to consumption and push GDP higher.
Weak dollar-relative GDP growth explains why the country’s economic growth, which is fairly robust in peso terms, feels hollow to most people in the B through E income segments, and why visible abject poverty seems to be persisting, if not actually increasing.
In a vacuum, the Philippine economy looks good; in a context that more accurately shows the relationship of the economy to the rest of the world, maybe not so much.
With concerns that the global lag may continue for some time—a point of view already expressed by the IMF and the US Fed—economic activity in this country will have to increase at a rate faster than anyone realizes now in order to keep up. For the first half of this year, the realistic growth target of about 6 percent is probably feasible, even in dollar terms, barring a serious dollar-relative decline in the peso. In the second half of the year, however, given that some level of chaos is likely to result from the election, which, even if it comes off without a hitch, is going to hand the country to a president with at best a mandate of about 30 percent of the vote, we may again see the country slipping toward dollar recession territory.