Monday 21 August 2017

Economy grows 6.5% in Q2 of 2017...what does it mean?

Government economic managers made a press release last week that the Philippine economy grew by 6.5% for the second quarter of 2017. But do we really understand the meaning of all that?

Philippine Star Business   DEMAND AND SUPPLY columnist Boo Chanco in his article titled “Gobbledygook” wrote a very insightful explanation of what that “grew by 6.5%” mean.

Below is the full quoted article:
Part of one's administration success is the percentage of how the economy has grown under his watch. The Duterte administration on to its 2nd year, projects it can meet all its set targets for economic growth(photo credit to the owner)

It is supposed to be good news… the economy grew by 6.5 percent, well within the government’s target range of 6.5 to 7.5 percent. Ask anyone who isn’t an economist or a technocrat or a policy wonk or a member of the entrenched elite what he thinks about it and you will likely get a stare.

It’s all gobbledygook for the common man.

Try explaining it by saying that it means our economy is doing alright and they will tell you they don’t feel it. The anxieties about meeting living expenses are front and center even for those with steady jobs and can be classified as middle class.

As for the masa in the so-called D and E socio-economic groups, they view the economy’s state in terms of hunger… how many times in the recent week or month did they suffer involuntary hunger for lack of money to buy food. The state of the nation’s economy is not measured by GDP alone!

A more basic measure of our economic well being should cover hunger. But government statisticians do not measure it quite the way SWS does. What good is a respectable GDP growth rate if millions of Filpinos still go hungry?

The good news is that the rate of hunger among our people is on a downward trajectory.

The second quarter 2017 Social Weather Survey, conducted from June 23-26, found the hunger rate at 9.5 percent. This is 2.4 points below the 11.9 percent (est. 2.7 million families) quarterly hunger figure in March, and is the lowest recorded since the 7.4 percent in March 2004.

But that still means there is an estimated 2.2 million families experiencing involuntary hunger at least once in the past three months. Assume five members per family and we are talking over 10 million hungry Filipinos.

Every president has told us to be patient because GDP growth is trickling to the bottom of our social pyramid. But last week, government statisticians also told us that our population grew to 104.5 million in the second quarter… a few more million new mouths to feed. The President’s anti-drug war isn’t killing more Filipinos fast enough.

It is not easy to soon wipe out hunger. There are so many moving parts that affect our economy’s ability to do that. And there are also external factors to consider. The optimism of our economic managers and private sector analysts about economic growth gives us hope.

But to see is to believe!

So, is this optimism about our economy sustainable?

Here is how one private market analyst summarized the state of the economy:

GDP growth momentum was sustained in 2Q17. Real GDP growth was sustained at +6.5 percent YoY in 2Q 2017 (1Q 2016: +6.4 percent YoY) on the back of steady domestic demand balanced the slower growth in net external demand. On QoQ basis, the economy grew +1.7 percent (1Q 2017: +1.3 percent QoQ). Maintain our full-year growth forecast of +6.4 percent (official: +6.5 percent to +7.5 percent).

Analysts agree that consumer and government spending will determine our growth outlook.

“For the rest of 2017 and 2018, outlook for the economy will be largely influenced by the strength in consumer spending and the government infrastructure projects. We expect consumer spending growth to remain resilient in 2H 2017, supported by favorable demography and job market conditions, sustained growth in OFW remittances.

“We expect some spending rush by consumers towards end 2017 ahead of the watered down consumption-based tax hikes under the proposed tax reforms beginning next year.”

The economist observed, “The Philippine President’s zany ideas have not hurt the economy.” But delays in approval and implementation of new infrastructure projects would keep Philippine growth at the lower end of the official +6.5 percent to +7.5 percent growth target range.

Household final consumption expenditure is a major contributor to GDP growth. This will be powered by increased domestic employment from industries and BPOs as well as OFW remittances. Hopefully, household consumption expenditure will not slow down despite increased pressures.

Government final consumption expenditure or the ability of the bureaucracy to absorb increased budgets will also strongly determine GDP direction. It was disappointing in the first quarter, but seems to be catching up in the second and if you believe the economic managers, it will go full blast in the second semester.

But if you ask the common citizens, their big concern is the fast depreciation of the peso. Economists assure that is not necessarily a bad thing. Indeed, many say it is a good development and should have come sooner. The BSP also keeps saying the exchange rate is market based and that we have enough reserves to respond to sharp changes (volatility) in the rate.

An economist friend of mine reassures “a falling peso isn’t necessarily bad. I think it’s good for the Philippine economy - for OFWs, exporters, domestic producers with high domestic inputs, BPOs, and even for government, which will get a higher tax take from the higher-priced imports. Media keeps portraying the falling peso as disaster in the making. That’s fake economics.”

But the man on the street is still worried that a weak peso will mean higher fuel prices/transport fares, higher peso price for imported rice, higher price for pandesal (imported flour), higher forex adjustment in utility bills (power, water). Traders and small industries with imported components worry about higher peso prices of goods and services they import that are not easily recoverable from the market.

Indeed, the peso has been the worst performer among ASEAN currencies since the start of this month. It has declined by 1.9 percent against the US dollar compared to its regional peers that fell by 0.2-0.5 percent.

The peso had slipped to a low of 50.240 last Aug. 4 before hitting the 51 to the dollar level by Aug. 11 and closed at 51.30 last Friday. Since this fast rate of depreciation didn’t happen to regional peers, there is probably a domestic factor involved. Could that be political risk?

Is the official excitement over our upward GDP growth trajectory sustainable? There are a lot of “ifs.”

On top of the list is the ability of government to really get the infrastructure program going beyond the power point presentations. How many shovel ready projects can they ground break this year?

Will the tax reform measure pass the Senate with enough incremental revenues that can be used to fund the infrastructure program?

Will the economy’s growth be inclusive enough to provide the 90 percent of the population we call the “masa” with enough consumer buying power? There are disturbing reports that the major consumer products companies have suffered lower sales levels in their core “sachet” market. That suggests a loss of purchasing power at the base.

Will the reported increase in OFW remittances be enough to offset a tempering of consumer buying power from the mass base? Investors are attracted to us because of the potential buying power of our large and young population. But will the economy give them that buying power soon enough?

Will the peace and order problems affect consumer behavior in the months ahead? Marawi remains unresolved and beyond Marawi, the threat of Islamist extremists is a serious nationwide concern.

Will the President’s “shoot them all” order to the police deter investors who value rule of law and a judicial system that guarantees fair and equal protection of the law?

What natural or man-made calamity is still in store for us in the remaining months? Bird flu is one, but has proven to be so far largely contained. Hopefully there will be no big typhoon or earthquake because that will mean all bets will be off the table.

Hopefully, no major conflict erupts in the Middle East that will force our OFWs to go home. Hopefully, the Trump administration will not force our largely American clients in the BPO industry to return to the United States.

And with the country sharply divided in our politics, the sustainability of our current economic gains is precariously in all of our hands.

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