The other day, local banking giant BPI offered an optimistic assessment of the Philippine economy, joining a chorus of public and private institutions maintaining a favorable outlook in the wake of a series of disappointing indicators.
BPI is predicting the Philippine economy will grow by 6 to 7 percent this year, pointedly not changing its forecast from the beginning of the year despite the first quarter’s disappointing 5.2 percent GDP growth, declining exports, and shrinking foreign direct investments.
BPI’s forecast is similar to that of the World Bank, which, while giving due regard to a number of risks facing the economy, still sees it expanding by 6.5 percent.
By contrast, the International Monetary Fund (IMF) said shortly after the release of the first-quarter GDP figures that it would “review” its Philippine growth outlook for 2015; IMF’s first-quarter forecast of 7.3 percent GDP growth was laughably off the mark. Two days prior to the release of the figures, however, the IMF said it saw no reason to adjust its original forecast of 6.7 percent growth for the full year, and is likely to limit any reduction of that figure to at most a couple of tenths of a percent.
The government, of course, is still confidently telling anyone who might appear interested in hearing it that growth this year will be in the 7 to 8 percent range because of a significant increase in government spending, and the general good intentions with which the Aquino Administration manages things. The government says things like this because that’s part of its job, but banking institutions presumably have a bit more objective standards, so their consensus range of 6 to 6.7 percent is probably more reliable and deserving of a closer look.
The common assumptions of the various banks and analysts are that government spending will increase as the year progresses; lower inflation—which is expected to rise toward the end of the year—will continue to provide a boost to consumer spending for a while, thus some expansion in services can be expected; that any action on interest rates in the US by the Federal Reserve will happen late enough in the year that most of its effects will not be felt until 2016; and that taking the Fed and other factors into consideration, the BSP probably will not change its own interest rates for the rest of the year.
Those assumptions are hard to square with the evident reality: Nearly halfway through the year, there has been no clearly discernible boost in government spending apart from spending for political campaigning, which probably does not have much of an effect on GDP at this early stage. A decline in both exports and imports is a strong sign of cooling consumer and industrial demand, in spite of low inflation and low oil prices. In terms of the impact of action by the US Fed, the analysts are probably right; a Fed move to raise interest rates has already been expected for some time, and will actually not present any surprises when it finally does occur.
That foreknowledge of Fed action gives us a clue as to why optimism about the Philippine economy persists. An increase in benchmark interest rates in the US in reality only affects the cost of the US dollar, making it more expensive, and consequently, making it more expensive to invest dollars here. As a result, FDI and hot money flows could reverse themselves. Since that is what everyone assumes will happen, investors will behave accordingly when the time comes, even if the reaction isn’t logical.
The same thing happens in the wider economy as well. None of the other assumptions of the analysts or government planners seems to be true, at least at this point, yet the consensus of growth in the 6-percent range is strong; strong enough, most likely, to be a self-fulfilling prophecy. Businesses and market investors will, consciously or not, base their decisions on what they think the environment of mid-6 percent growth will mean for them, and as a result, create that environment with their actions.
And that is good news, because it means the economy has enough inertia to withstand just about any big shock; growth may dip in a particular quarter or even in a couple successive quarters, but probably not below the still-respectable growth rate of about 5 percent. So long as you are not among the unemployed or the impoverished—if you are, the steady state of the economy means your situation won’t get any worse, but it will take a long time to get better—you can relax; no matter what happens or who is eventually picked to lead the country after President BS Aquino 3rd, things will probably not change to any noticeable degree.