Needless debate on recession

THERE IS, to my mind, needless debate on whether or not the Philippine economy will go into recession this year.

I have argued in this column that the debate is largely moot, as the Philippine economy has in fact already contracted in the first quarter of this year relative to the previous quarter, at close to -10 percent on an annualized basis and corrected for seasonality. And while it takes two consecutive quarters of contraction to be officially declared in recession, the second quarter is over by tomorrow and there have been more indications that things have been worse than better in the past three months.

We could quibble over whether growth is better reckoned year-on-year (whose main advantage lies in how it automatically avoids seasonal effects) or quarter-on-quarter with a seasonal correction. While our officially-announced growth numbers are based on the former (hence the still positive 0.4 percent growth announced for the first quarter), some countries choose to report GDP growth on the latter basis. The US announced last week that its economy shrank 5.5 percent in the first quarter, based on an annualized quarter-on-quarter approach.

Misplaced

Aside from the matter being moot, the recession debate is misplaced for at least two other reasons. First, there is really little difference between the numbers on both sides of the debate. The difference may not even be statistically significant, given the usual margins of error in the growth estimates.

Under their latest updated projection, the third for the year so far, government economic managers believe that the economy can still grow by at least 0.8 percent this year. But given confidence intervals in the data and the substantial changes the numbers often undergo upon updating and revision, that same estimate could have just as well been -0.1, for example.

More importantly, it is not the growth number per se that ultimately matters, but it is how its outcome is felt by the general population in terms of their general well-being. Was the growth, or lack of it, accompanied by an ample increase in new jobs generated in the economy? Were the new jobs of good quality—i.e., stable, secure and well-paying? The economy could be growing at 5 percent, for example, and yet not produce enough new jobs to gainfully employ the new additions to the labor force. Or it may hardly grow at all, and yet somehow still generate enough jobs to reduce the unemployment rate.

Seeming contradictions

On the surface, the first quarter appears to have been a case of the latter. With the recent jobs data from the April Labor Force Survey, the first quarter slump in output would appear not to be such bad news after all, considering that it reportedly came with the net creation of nearly 1.5 million new jobs. This is more than the one million needed to catch up with the annual increase in the working-age population. In contrast, just the immediately preceding quarter saw much faster (4.6 percent) output growth, and yet much less job generation (565,000 net new jobs).

At first glance, these seemingly contradictory output-employment outcomes in the past two quarters are puzzling. But they highlight the fact that there is nothing sacred about the GDP growth rate, and whether it is positive or negative could be of little consequence. The true test of the economy’s well-being is whether the ranks of the unemployed and of the poor are diminishing, and people’s welfare are improving in general—and experience everywhere has shown that good GDP growth by itself is no guarantee of that. Indeed, it is not inconceivable that these positive developments could transpire even as aggregate GDP fails to grow, or even declines in a mild recession.

Closer look

So if we got seemingly good employment outcomes in the first quarter in spite of a production slump, is slipping into recession something we even need to worry about? Aren’t we doing fine anyway even with little or no output growth?

Well, not quite. The aggregate numbers may look good, but a closer look at the jobs data reveals that the news isn’t all that positive. Of the total new jobs as of the first quarter, the largest groups were in agriculture (408,000 new jobs), wholesale and retail trade (346,000 jobs) and private household employment (139,000 jobs). By worker category, self-employed workers accounted for 609,000 of the new jobs, while unpaid family labor increased by close to 400,000. One can surmise from these data that the new “trade” jobs were probably mostly in the informal sector (i.e., self-employed vendors), while the new agriculture jobs are mainly unpaid family labor.

In other words, the economy may have generated almost 1.5 million jobs last year, but the quality of those jobs still leaves much to be desired. In fact, the proportion of wage and salary workers to the total employed workers has gone down a full percentage point, while those of self-employed and unpaid family workers have gone up.

In short, whether we’re looking at employment or GDP growth data, it’s not just quantity that counts, but quality as well. And we need to go beyond positive or negative signs to see that.–Cielito Habito, Philippine Daily Inquirer

Comments welcome at chabito@ateneo.edu