Rising unemployment a big threat to economy

Rising unemployment would be a political nightmare for the Arroyo administration this year, posing a greater threat than potential external account weakness amid slowing exports.

In a report, Citibank said the deterioration in the country’s exports has heightened the threat of more job losses to start the year and tightening job market would weaken consumer spending.

As a rule of thumb, Citi said in a report that jobless rate rises by 1.4 percent for every one percent drop in gross domestic product, equivalent to about 470,000 jobless workers.

According to Citi, the first wave of job losses had been characterized by the closure of Intel’s plant in Cavite with over 1,800 workers laid off, as well as reports of furniture exporters closing up in Cebu and the likelihood of retrenchment of workers in most labor-intensive export industries most vulnerable to the global recession.

According to Citi, the next wave could come from returning overseas workers with shortened contracts. Because of weakening global economies, these workers would also be facing fewer job opportunities abroad and even less in the local job market.

“Amid a sustained increase in the labor force at a pace higher than the population growth rate, we continue to expect a jobless rate of nine to 9.5 percent in 2009, up from seven to eight percent in previous years,” said Citi analyst Jun Trinidad.

The threat of a higher jobless rate, according to Trinidad, would put pressure on government to sustain its “furious pace” of non-interest fiscal expenditures.

“Rising jobless rate would be a political nightmare for the incumbent local and national leadership as we approach the May 2010 elections,” Trinidad says.

According to Trinidad the collapse in export readings since October 2008 and the risk of returning overseas Filipinos would stoke the risk perception of a dearth in current account flows.

Rather than a drop in headcount, however, Trinidad said Citi is expecting severe cuts in wages to safe job opportunities available. He said this meant that Citi expected remittances to grow by only three percent this year.

Trinidad said, however, that the drop in imports coming from lower oil prices as well as lackluster domestic demand would provide an effective offset to weak exports and remittance flows.

Trinidad said Citi is projecting a trade deficit of less than $10 billion this year after the deficit level hit $12.5 billion in 2008.

“The projected trade gap could be easily financed by remittance flows despite assuming lean growth of zero to three percent, with plenty more dollars to spare for a potential current account surplus,” Trinidad said.

The downside to the export slack and the resulting unemployment risk, however, was that the market sentiment can easily give way to bouts of risk aversion.–Des Ferriols, Philippine Star