Perils of overoptimism

As the world leaders and the International Monetary Fund gather in Los Cabos, Mexico on Monday fretting on Europe’s uncertain future and trying to inject new confidence in the deteriorating global economy, a Filipino economic team, sans the NEDA Director General, is touring the United States on what is called a non-deal road show. The team is showing off the good news: the better-than-expected 6.4% gross domestic product (GDP) growth in the first quarter of 2012.

So while the rest of the world is worrying about the likelihood of another global collapse, team Philippines is boasting of its mini-trophy, a good performance for one quarter. Perhaps a celebration is in order after a dismal economic record in 2011. Let it be.

But the economic managers should quickly come to their senses. One good quarter performance does not make a good year performance. And there are many roadblocks down the road.

The global economy has turned uglier and more volatile. The narrow victory of the pro-austerity party in Greece has managed to walk away from the abyss. But for how long? The problems such as the huge debt burden and the economy’s uncompetitiveness remain. The problems in Spain and Italy, two or the world’s biggest economies, are just starting to unfold. There are still no permanent solution to the Europe’s growth- stalling debt crisis.

The political landscape is being redrawn. The anti-austerity movements in many European countries are gaining grounds. Perhaps the restoration of growth, rather than more sacrifices, should be the focus of economic leaders in the next few quarters. But that’s easier said than done given the volatile political climate in many capitals in the world, combined with the bullheadedness of some leaders of affluent but fiscally conservative nations.

The Philippines will not be immune from a global slowdown, as shown by our experience in 2008 and 2009. A slower, more uncertain, global economy will infect the Philippine economy not directly through banks but indirectly through the real economy. Exports will slow, remittances will thin, and foreign direct investments will contract further.

TROUBLES AT HOME

New data last week provided more evidence that the 6.4% growth in the first quarter is losing steam.

The jobs market continues to be hobbled in the sickbay. While it is true that one million new jobs were created, year-on-year, the number of part-timers has increased by 2.5 million, while the number of full-timers has dropped by 1.6 million.

Factory output has been volatile and anemic. Last year, the volume of production index grew by a measly 1.1%. In the first trimester of the year, growth was directionless and low: 0.1% in January, 6.4% in February, 8.9% in March and 5.5% in April — not the speed of growth to be expected in an economy that is growing at 6-7%.

Exports continue to struggle. From January to April, exports grew by only 5.5%. Electronic products, the bread-and-butter of Philippine exports continue to contract. It fell by 1.8% in the first four months of 2012, on top its 23.8% drop in 2011.

Remittances from overseas Filipinos has slowed to its lowest level. From January to April this year, OFW remittances grew by only 5.4%.

There is a risk that overseas Filipino worker (OFW) remittances might slowly stagnate in the future. Growth of OFW remittances peaked in 2005, but it has unmistakably gone south since then. I can think of three reasons: first, the Filipino overseas labor market has matured; second, competition from other countries has increased; third, the global environment has turned uglier due to rising political conflicts in some parts of the world and deepening economic hardships in many industrialized countries.

A strong inflow of remittances support consumer spending. With slowing remittances, and rising uncertainty, families of OFW workers are expected to buy less, and save more.

Not surprisingly, the Bangko Sentral ng Pilipinas announced that consumer confidence was down in the second quarter of 2012. And because economic growth in the Philippines is consumer-led, weak consumer spending would mean slower overall economic growth.

GOVERNMENT AS WHITE KNIGHT

Can strong government spending be sustained all through the year?

No, unless a supplemental budget is requested and granted, assuming more resources are generated.

But it’s too late for that. The total budget for 2012 is only 8.4% bigger than the budget in 2011, to P1.854 trillion from P1.711 trillion.

The infrastructure budget for 2012 is P182 billion, or 27% higher than the P145 billion in 2011. The 27 % increase may look impressive but only because it is compared to a rock-bottom level in 2011. But as percent of the expected P10-trillion economy, the public infrastructure budget is puny indeed.

Can local governments be relied upon for additional spending? Not really. Local governments have less resources in 2012 compared to 2011. The central government grant, the Internal Revenue Allotment (IRA) is down 4%, to P289 billion P301 billion. And since local governments are not immune from the overall economic malaise, I expect them to collect lower own local taxes.

As Philippine authorities bask in the glory of the higher-than-expected GDP growth in the first quarter, they might not see the looming dark clouds. But failure to heed the warning signs could be disastrous. Public policy works with a lag, sometimes with a long lag.

In a way, this is akin to what happened last year. By the second quarter, it was evident that the Aquino administration was behind in implementing projects according to plan. But government authorities continued to be in denial up to the fourth quarter. And when they finally acknowledged that there was a problem it was too late.

Another economic storm is brewing. Is the Aquino government prepared for it, if and when it reaches Philippines shores? Is there a Plan B, and who is preparing it?

Benjamin Diokno is professor of Economics at the School of Economics, University of the Philippines(Diliman). He was formerly secretary of budget and management in the Estrada Cabinet and undersecretary for budget operations in the Aquino 1 administration. –Benjamin E. Diokno, Businessworld