The standard definition of a recession is when the gross domestic product (GDP) sinks for two consecutive quarters. The additional three months is an economist’s dispensation to initial contraction. Even for politicians and presidential appointees that should be easy enough to understand. Never mind that in the convenient colloquialism too-often applied, controversy constantly confounds.
There are none so blind as those who refuse to see. The ignorance of some and the alienation of armchair commentators underlie not only the question of inevitable recession but also on recovery measures once infected.
In an economy short of confidence and credibility little can substitute for the analysis of such agencies as Moody’s, Standard and Poor’s or the IMF – World Bank who measure, not simply two quarters of contraction, but aggregate supply and demand, measuring the elasticity of prices to resurrect an economy from economic shocks.
Additive price burdens provide the friction that prevents prices from stimulating demand. The effect on overall prices by the government’s refusal to grant tax breaks, the Finance Department’s adherence to perpetuating predatory E-Vat, aberrant royalties, our vulnerability to high tariff multipliers and the propensity to cook up ludicrous taxes to sustain an expensive bureaucracy damages what recession resiliency we might have.
To analyze the recession that we constantly deny, we will use the official data from the National Statistical Coordinating Board.
Seasonally adjusted GDP fell by 2.3%, the lowest since emerging from the dictatorship years. That’s a contraction. At constant prices, first quarter GDP registered a gossamer-thin 0.4% growth down from 3.9%.
Unfortunately, the reporting lag from agriculture, fisheries and forestry where a 2.1% growth was posted is slowest. Worse, because this sector accounts for 19.4% of total domestic production, when seasonally adjusted, this sector actually contracted by 1.0% with the declines in “other crops”, corn and sugarcane.
Our fallback services sector registered 1.4% growth, a decline of 2.1%. As services account for 49.8% of GDP, the writing on the wall cannot be ignored. When seasonally adjusted, services had grown less than 1.0% in each of the last five quarters.
Our industrial sector, which includes construction and accounts for 30.5% of GDP, fell by 2.1%. Sycophants and their publicity agents who spin that catch-up infrastructure spending will result in GDP growth might do well to note the arithmetic.
Gloria Arroyo’s deficit is ballooning. She says the economic resiliency program (ERP) will be aggressive this second quarter. What ERP is that? Her numbers show a deepening deficit with infrastructure spending anemic and less than 20% of total government spending.
Moreover, total construction accounts for less than 2% of GDP. No amount of Genesis-like creation can swell those enough to make a difference. Even government consumption spending at merely 6% of GDP is ineffectual as Arroyo’s deficit forces us into expensive debts and bonds, too late to forestall a recession.
Given declining export revenues, a significant contributor to GDP, the second-quarter increase in petroleum prices, an across-the-board price multiplier that keeps prices high, and the spending dampeners from seasonally mediocre mid-year remittances and increasing unemployment, the seasonally adjusted data show recession is here.
Our GDP crash may not reflect the deterioration in the quality of life. But it forebodes fire and brimstone when it goes from a high of 6.1% growth the government boasted in its initial budget assumptions to a minus 0.5% calculated by rating agencies and creditors awakened by reality. Note that per capita GDP declined by as much as 1.5% where the per capita output in strife-torn Angola is now twice the Philippine’s.
In a recession, aggregate demand falls while overall price levels, slow to react when afflicted with additives, remain high. Growth reverses into recession due to the inverse relationship between price levels and aggregate demand where, at high prices, people would rather buy at low output levels.
Remember what damages resiliency? It is price adjustments that will deliver us from a recession.
For now, recession is fait accompli. Unfortunately high prices tend to make recession linger. To shorten the period to recovery, government must revise policies that squeeze blood from stone. It does not do that by refusing tax breaks, or the perpetuation of predatory taxes and aberrant royalties on economic multipliers like energy tariffs; or the inanity of additional consumer taxes to sustain an expensive bureaucracy or fatten campaign coffers.
Popularity: 1% [?]
Dean de la Paz’ blogpost submission is another reminder to look at Jamby Madrigal, Mar Roxas and all others who want to be the next Malacanang-resident. What, if any, have they said about the government bureaucracy (will they continue with headcount reductions?), tax-collections and their approaches to the economy?
GMA econonomics and Erap-economics can be used as baseline. [GMA-approach and Erap-approach can also be used when viewing the candidates' proposals for Mindanao and the MILF.]
… What I mean is this : If you like GMA’s economic performance and Jamby enunciates policies similar to GMA, well, then Jamby is OK by at least one metric.
If you hear Chiz Escudero’s econ policies and practices and they reflect Erap-style, and you like what happened to Pinas economy under Erap, you’d like Erap, then.
Dear Mr. UP Grad,
There will be a forum on precisely those topics, Revenues, expenditures, taxation and the leaks due to corruption. Am part of those organizing the forum and the invited moderators are Ciel Habito, Cayetano Paderanga and Winnie Monsod.
The unstated reality among these aspirants is that they would rather attend fora where motherhood statements are acceptable as platforms.
Dean
I hope you have a productive forum. Add “return on investment” to the goals mebbe, or during another forum. Opening up the books is important, I would think. Secrecy with the public’s money is not good policy.
Joe
I hope the author would be willing to discuss even with what he calls “arm chair commentators”.
sa ngayun pa di ko nga maintindihan kung paano maexplain ng Okun’s law
ang anomaly that in 2007 the average gdp growth was almost reduced by half compared to the year before but unemplyment continued to drift downward(us data)
(parpahrase of what i read but not understood: http://www.kansascityfed.org/Publicat/ECONREV/PDF/4q07Knotek.pdf)
was it because of of reporting magic or reporting lags?
dahil we all know what happened afterward unemployment surged and the ninjas (no income no job)were said to be the cause.
Since I am no economics expert I will just provide data where to validate what you said about debt servicing.
On the budget report the president said that debt servicing was reduced by blahblah percent as compared to the previous year.
Don’t take my worrd for it look at the dbm site.
2009
interest payments would be 252,550,000,000
and principal ammortization 378,866,000,000
2008
interest 269.8 billion
principal 328.3 billion
Sure the interest payments got reduced,but add the principal then debt servicing WAS NOT REDUCED as advertized.
about the bureaucracy:
the recent salary increase of government employees recently inceased the allocation for personnel services.
So The Rationalization “come on” was overtaken by the reality of a potential rise of unemployment if they slashed the bureaucracy.
(I won’t comment on the additional agencies as results of favors and the necessary ones that is really badly needed)
About your policy shift proposals.
The senate website and other websites are not lacking of policy briefs from their economic planning team.
The medium term development plan was done by NEDA,changing NEDA chiefs won’t solve the problem.
Our yearly budget system defeats the purpose of any medium term development plan even with ACCURATE economic indicators and spot on projections.
Any other suggestions?
Mr. dela Paz,
As former consultant for Energy Affairs of the Joint Congressional Power Commission,
You know in real life how policy proposals and policy implementation works.
I wish you can participate in the discussions.
Gloria Arroyo claims to be an Economist. Why is it that we have
these economic problems, so severe that people are seeking employment
abroad ? Textbook Economist ?
Let’s see how much of the ERP and the 2009 IRA’s intended for hard and soft projects will reach the beneficiaries. Out of the 100% budget, 50% goes to national agencies and legislators handling the funds, the balance of 40% will be divided by the local based crocs (region, province and municipal level). The remaining balance of 10% goes to the project. That’s the current SOP – worst than the 30% cut 15 years ago.
Dear Hyden Toro,
You may want to check with the economists who mentored Arroo in U.P. where she got her degree. Her grades explain a lot and may answer your question.
BTW, people were seeking employment abroad even before Arroyo took the reins.
It is simply convenient to blame her for the mess. What we would be fair to do is to blame her for aggravating it.
Dean
Let us see. The build up in unsustainable cheap credit finally blew up in September 2008 in the major advanced economies in the world. That then caused a drastic fall in the real economy in those jurisdictions. Hence consumption simply collapsed leading to the dangerous spiral into deflation.
Now the emerging markets saw their supply side export markets suddenly contract. Those with vital domestic markets simply changed gears and used fiscal measures and countercyclical (cheap money) monetary measures to replace what they lost in household and business consumption.
However the Philippines does not have either a vital domestic market to speak of to turn to and since it is a net importer of capital (trade deficits and budget deficits) and a huge debt overhang (foreign and domestic) it is caught in what is known as a debt trap. However the demand contraction here is not a result of a collapse in demand domestically. An external event caused it. So fiscal stimulus is useless.
There is almost nothing to stimulate demand when the structures essentially are of a third world system.
Since we are not a major manufacturing economy we do not have any surplus capacity that has been affected.
We are to small to be affected by this major storm overseas.
You cannot and (I repeat this for emphasis look) at the Philippine economy through the eyes of a macro economy. Hence “recessions” or contractions of the economic business cycle here in the country can only be caused by a balance of payments crisis.
That is caused by the deeply rooted savings gap, foreign exchange gap and budget gap.
In point of fact the deflation in the world economy has benefited the country as we have had disinflation. (slowing down of the headline inflation rate.)
What we have to worry about is the financial economy in the global economy that will move to hedge their funds in commodities that will drive the price of oil, strategic commodities like iron ore and eventually food costs higher as the dollar is under threat due to the massive additional borrowings of the U.S. government projected to be in the trillions to cover their fiscal deficits for the next five years.
Enough of this nonsense about recessions. As long as you guys overseas keep on sending dollars our problems are not serious. We still have the drug lords, smuggling lords and the jueteng lords driving growth in this country.
Government stimulus packages simply means expanding government employment in primarily non-productive projects.
We simply increase our debts to produce growth that is simply for growths sake.
The public sector debt stock will grow. This includes the national government debt plus all GOCC’s plus the BSP and LGU’s.
The upside, the mercantilist import-substitution paradigm of the Philippines is not too affected by the global recession in international trade.
The downside, has minimally benefited from the global international trade, due to the the mercantilist import-substitution paradigm.
For short, no progress :)
Dear BongV,
I agree. Bteer still, you may want to check as to when those debts were incurred and to which government agency the proceeds were applied.
When i last looked, more than 51% of debt service was due to borrowings incurred by the National Power Corporation either directly and thus within its balance sheet, or indirectly, piggy-backed on other Philippine bonds.
Dean
Would be happy to get inputs on how the local real estate markets including commercial and private house prices in the entire country have responded to the global recession. Maybe including rental rates in both residential and commercial spaces.
In our locality in Northern Mindanao, subdivision lot prices continue to maintain their pre-recession levels, some even reflecting upward adjustments.
Markets too small, or to unsophisticated, or not too developed as to be negatively affected by strong widespread recessionary pressures?
Dear Amadeo,
I don’t have the real estate numbers but I suspect that the Mindanao values, that region being affected by entirely different demographics, would not reflect the same in Luzon.
Dean
In the US, the economy is effectively managed by the Federal Reserve Board, an independent authority set up by politicians smart enough to know that the economy needs a steady, apolitical manager. The government can still run up deficits of course, but the Fed is respected for its inputs, as the Chairman and others are regularly testifying before relevant Congressional committees.
Here it seems that the pork expenses and the backward fee-taxes and ability to borrow or set rates are all tools of the politicians, and there is no standing, objective manager of economic good. True?
My view is admittedly naïve, but I suspect that the still-fairly-new VAT provided a strong boost to economic well-being, but that benefit has been eaten up by profligate spending and borrowing, and now the chickens are coming home to roost.
Alas, they look more like buzzards than chickens, and with the election coming on, anticipate more buzzards dipping in for their piece of the . . . ummmm . . . pie chart.
Profligate is the word of the day, obviously.
Joe
Dear Joe,
The equivalent in the Philippines is the Monetary Board. Macroeconomics is their province while it is the Department of Trade (Trade) and the Department of Finance (Finance) that tackle the microeconomic issues you state.
VAT is a revenue measure handled by Finace and its effects, as a consumer tax on all products and down the value chain are concerns of Trade.
The powers of the Monetary Board are confined to banking and financial institutions and regulating money supply (inflation, exchange rates, interest rates and printing money -those are the tools available to it)
Ah, not so different then. US is Dept of Commerce and Dept of Treasury.
Thank you.
Joe
Dean dela Paz wrote above : the per capita output in strife-torn Angola is now twice the Philippine’s.
This suggests that there is truth to what Prof Villegas has said — wages / labor-costs for Pinoys-in-Pinas is excessively high.
Not really.
The Angolan example shows that per capita gdp is not an accurate measure when used alone. Angola’s economy is based on the oil and diamond trade. GDP by itself does not show that the rvenues from those industries never reach the people.
Hi Karl,
The 3% threshold of Okun’s law applies only to the USA. It is probably different for the Philippines. But the law’s premise is still valid. You need more than average growth if you want unemployment to decrease. That means that at 1.8% growth, there will not only be continued unemployment, it will in fact increase. The jobless rate will rise.
When looking at GMA’s historical numbers like GDP, I am not implying that there was “magic” behind them. We just have to look at what addends comprise the GDP to understand it. The problem is that most media simply states what is stated to them without digging deeper. Thus they invariably focus on one measure forgetting others. Like some of you said, the hunger index as well as the perceptions of hunger, an aggregation of all measures, matters just as much as the arithmetic.
BTW, I am still with the Joint Congressional Power Commission.
Professor de la Paz,
Thanks a lot for your inputs.
Nice to know that you are still with the Joint Congressional Joint Power Commission.
I wonder if there is any statistic on lost revenues due to corruption in the BIR as well as uncollected taxes. Same question on Customs and similar collection agencies.