0.4%!

0.4%! That’s the growth of the GDP for the 1st quarter of 2009 versus the same quarter last year as reported last Thursday. Seasonally adjusted, that translates to a figure of -2.26%. Wow! Nobody as in nobody got the Philippine GDP prediction right. Most of the economist (including those from the WorldBank and IMF) figured that the Philippines would grow somewhere between 1 – 3%, the government in fact was looking at more than 3% GDP rate (see “CRYSTAL BALLING 2009 – THE SLOWING PHILIPPINE ECONOMY – IS IT LUCKY?” dated December 16,2008) The fact that the GDP rate went below most economists expectation is beside the point. The real issue here is the fact that the GDP number figured closely to zero at 0.4%. Notation-ally speaking, a number close to zero means a stagnant economy however if inflation were to be considered, the economy is in reality contracting and because of that, we are in a RECESSION. Of course, some perennial optimists would argue that we aren’t there yet considering that recession is by definition, two consecutive quarters of negative growth and that the figure isn’t “exactly negative”. In short, if you were to listen to the die – hard optimists, the economy is just “teetering on the brinks” of recession and not yet in recession. Well, not to be a pessimist but we’re already over 2/3 of the 2nd quarter and by all indications, it’s no rosier than the 1st and in fact, it seemed to be pretty much worst. If you were around in the country during the second quarter, it seemed that after the Holy Week vacation, Filipinos suddenly became misers and withheld spending altogether. One of primary reasons is the early opening of school season (school opened on June 1 this year) and “normally”, people saved whatever they can to pay for the tuition fees and everything else needed to breeze through schooling. As such, spending on most “non – essentials” including holiday vacation trips are done way. Talk about the “resiliency” of the Philippines against the Global Financial Crisis. It seemed that we aren’t immune after all. Anyway, the debate as to whether or not we are in a recession is irrelevant at this point. What is more of a pressing concern is that “how long would this situation last?” “Theoretically” speaking, the Philippine economy shouldn’t perform this badly given the fact that 2010 is an election year and that incumbents would “move heaven and earth” to have government spend money on infrastructures in order to court the goodwill of the electorates in hopes that they would get reelected come 2010. But with a government constantly in short of money, a “fiscal stimulus” plan (to stimulate the election hopes of the incumbents and secondly, to steer the economy out of the doldrums) may actually fall short of “stimulating” the economy. It is not that the government didn’t pour money into the “system”. They actually did except that the magnitude isn’t “big” enough to cover the shortfall from “other sources of demand”, namely personal consumption expenditures or consumer spending, which grows only 0.8% in the 1st quarter and private investments of businesses, which actually contracted. In layman’s term, the Filipino consumer stopped spending except for necessities while businesses became cautious in their investments on building up inventory for eventual sale, on new ventures, and on new production capacities. Even so, there seemed to be a great chance that the government would still embark in a “spending spree” just to prop up both the economy and the politicians seeking reelection but whether or not that would make a dent on the economy remains to be seen. On the personal consumption front, consumer spending in the last few years is largely driven by the huge remittances from OFWs (Overseas Filipino Workers). Aside from that, the “call center boom” has also contributed to the improving purchasing power of the Filipinos. That all changed last year with the weakening of consumer spending, which is attributed to the sudden change of behavior of Filipino consumers from one of conspicuous spending to that of “saving for the rainy days”. And 2009 is no different. This is in spite of the apparent hefty growth in remittances in the 1st quarter of the year. The primary reason I think for the sudden behavioral change is the perception of consumers on the future well – being of the Philippine economy. A cursory look at the Philippine economy would reveal that the country is highly dependent on the American economy. The United States is our largest export market. It is also our largest call center market as well. America also hosts one of the largest OFWs communities and as such send a huge share of our dollar remittances that is propping the Philippine economy. With America in the red, job losses locally and in the US among OFWs are expected and plainly evident and this in turn contributed to the mentality that hard times are ahead of us and thus altered our spending habit. In my opinion, on the short term, the American economy would seem to start to turn the corner but a full recovery would take some time (see “The World Economy, 2010 - , dated May 6,2009). And because of that, it would take some more time after the full American economic recovery before the effects of the American turn around be felt in the country (in terms of exports, call center service demand, and demand for OFWs). There is a lag phase. On the business investment side of the economic demand, according to UP economists, Philippine businesses actually follow a boom – bust cycle of 6 years, which overtly coincides with the political – electoral cycle. The reasoning behind that is that with a change in regime, there follows a “restructuring” of the business “hierarchy” with some businesses being favored over the other while others are being “prosecuted”. Such restructuring opened up business opportunities, which embolden the favored businesses to invest more thus, jumpstarting the “investment boom” at the beginning of each new administration. As times goes by, with political reality settling in and political environment becoming more stable, the new administration’s policy directions would also get clearer, which encourages further investments even among the most skeptical. This “investment boom” would peak somewhere on the 3rd year of the administration continuing to the 4th or maybe even up to the 5th year. By then up to the 6th year, businesses would turn cautious, withholding investments, and adopting a wait and see attitude in order to avoid potential losses in the event of “policy reversals” of the next regime (hence, the oft complaint of businesses about the government’s lack of continuity, transparency, and sustainability of policies). After which, the whole cycle starts again. One way of viewing the current economic situation in the country is that on one hand, the economy is battered by the current Global Financial Crisis and on the other hand, it is also affected by the upcoming political uncertainty brought about by the coming election. Based on this diagnosis, the short term scenario of the economy looked terribly weak and in my opinion, the earliest that the economy would turnaround would be in early 2010 (due mainly to election spending) if not the 4th quarter of 2009 that is assuming the American economy would be on its way to recovery. A definite recovery in my view would begin in mid 2010 right after the election.