The Philippine economy: What happens this year?

A question asked at the beginning of any year concerns what to expect about the economy. Some of the answers given are often based on guesses. There are however intelligent answers as there are uninformed.

Here is a picture of the factors to understand in making a prediction of what could affect the Philippine economy this year. It begins with understanding the international environment. In the next week, I discuss what could happen at the national level given government plans and policies.

International environment

World economic recovery. As an economy that is open to imports and exports and international money flows, the Philippine economy is exposed to major economic and political developments in the world economy. Developments in important countries affect us directly through major trading and financial transactions.

The US economy still drives most of the world’s economic directions. To the Philippine economy, the US is a significant source of two-way trades and capital flows. Developments in Japan are also very important in the same sense. Japan is seriously affected by the rhythm of the US business cycle because of their huge trading activities with the US and the world. China has become a major stimulus for the Philippine economy: Its growth induces demand for Philippine exports. And in turn, China is a major source of industrial and agricultural Philippine imports.

The mood in the US economy has been one of recovery this year. That recovery could be slower than what most would have wished earlier. Barack Obama’s administration was weakened by its defeat during the midterm election. But it has pragmatically altered course to remain in control of the economic agenda. The mood of political compromise assures that forward motion and not stalemate would be the rule and the recovery will be sustained. Monetary policy stimulus initiated by the US Federal Reserve to substitutes for the slack arising from lack of aggressive fiscal stimulus to raise US domestic spending.

China’s economic growth might slow down from the 10% customary annual growth but that rate of growth could not fall below eight percent based on its past record. That is still a high rate of growth to be able to drive regional economic growth in Asia.

Two rising developing country giants add to China’s growth impetus. India has sustained a high annual growth rate of around eight percent per year. And Brazil – the giant Latin economy – has been enjoying sustained high growth rate for years. All these large developing economies will support world economic recovery.

China’s large holding of American fiscal debt assures it of bargaining clout in world economic affairs. China’s presence is also felt in Europe as investor, creditor, and trader. In this role, it provides competitive challenge to all traditional economic players including the major European countries and Japan on the world stage.

The economic crisis in Europe will continue with unsettling internal dramas being played in various smaller countries. The threat of widespread collapse among these countries appears to have been contained with group action on the monetary front to bail out the countries from their highly indebted situation – both international and European.

Much “noise” will continue to be heard in the challenged economies of Greece, Ireland, Spain, and some other former Eastern socialist countries that are now new members of the European Union. In these countries, there is a choice to make between painful economic medicine in order to regain a chance at economic recovery and survival against more long term sickness.

To cure its own internal malaise, even France took action in the previous year to reform their labor and social laws. It rolled back generous social programs to meet new realities. The change would help to reposition France’s labor market and raise labor productivity. Such difficult example of labor reform might be seen as a step toward taking painful medicine in adjusting their labor market.

Traditionally, Europe had not been as significant to Philippine economic development as the US and Japan. But Europe has regained economic strength relative to the US in the past decades. Moreover, Philippine direct relations in trade and finance with Europe have risen.

Europe faces great uncertainty during 2011. But if the US economic recovery firms up, the prospects for Europe immensely brightens too. The continuous drive toward growth of developing country sleeping giants that is evident in the likes of China will give a positive picture for the world economic recovery overall.

Commodities. The prospects of recovery of the world economy and the presence of new big players will cause rising prices of some industrial materials. Most of these commodities are natural resource based – including energy – but some are reproducible commodities from industry and agriculture made by specialized countries.

Volatility of commodity prices can be expected with an upward trend as world economic recovery proceeds. The usual volume of demand for some goods can be affected by disruptive sudden changes in demand.

Why? Additional increases in demand brought about by highly growing developing economies put a pressure on world supplies of these commodities. Raising output capacity is still not easily guaranteed so that volatile prices could be expected as new and traditional buyers of commodities compete for the supplies.

For countries that are highly dependent on imported energy like ours, this paints a grey picture on the horizon. New demand for energy that is surging in these new industrializing countries helps to trigger energy prices. Hence, cost inflation induced by energy prices could result.

Though the Philippine economy is no longer as dependent on energy as in earlier decades, that dependence still constitutes a significant amount. Recent actions of the government to raise major public utility prices related to higher energy prices have already set the stage for this reality. This type of price flexibility is needed to avoid major crises in supplies felt at home but they also hurt domestic consumers.

The country’s endowment of minerals like copper, nickel, gold and other resource will be a boon to the economy. Earnings from mineral exports will serve as a buffer against rising energy prices. This possibility could be achieved if expansion of mining output arising from new investments materializes. As energy prices of imports go up, so do earnings from exports of these minerals. Along with rising OFW remittances, the country’s balance of payments picture remains unthreatened.

Agricultural commodities are always important to the economy. To maintain a sound food balance, the major imports of agricultural products will continue to register in terms of rice, wheat, and corn. Otherwise, the threat of food price inflation looms.

Predicting the course of these commodities during any given year is problematic. The reason is that the weather plays a huge factor. The weather is difficult to predict in any country. The crop harvests of major producers could benefit from good weather. But they could also be badly disrupted by bad weather.

Unless the country can reduce the imports of rice and corn – wheat is nearly a non-tropical crop and therefore difficult to substitute with local production – the uncertainty about commodities affecting Philippine economic performance will be dependent on developments abroad, in the country of origin of the imports. We need corn as industrial input and for the food industry – livestock and poultry. –Gerardo P. Sicat (The Philippine Star)

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