Unrealistic economic forecasts

By Andrew J. Masigan, BusinessWorld, 31 Jan 2021

Frequent changes and unrealistic figures have made it difficult to believe the government’s economic forecasts.

Last year, the National Economic and Development Authority (NEDA), the Department of Finance, and the Bangko Sentral jointly adjusted their GDP growth forecast five times. Each time a new forecast was announced, we would be bombarded with reasons as to why we should be optimistic. Without fail, however, these reasons were debunked when the actual quarterly statistics were released.

In the early days of the enhanced community quarantine (ECQ), the trio of government agencies announced that the economy could still grow by .08% for the year. In May, they adjusted it to -3.4%. In September, they adjusted it yet again to -6.6%. Last month, they changed the forecast “with finality” to -8.3%. As expected, all forecasts proved exceedingly optimistic when the real numbers showed a contraction of 9.5%.

The frequent adjustments suggest either a lack of a real understanding of the situation, however volatile it may have been, or a deliberate effort to paint a rosier picture than the circumstances merit, even if based only on conjectures. I tend to believe the latter.

We still recall how the trio predicted a sharp spike in pent-up consumer demand when the ECQ was to be lifted. We remember their assurance of a spectacular ramp-up in infrastructure spending in the third quarter, the magnitude of which was enough to pull up the economy for the rest of the year. We took them at their word when they said that the government would hire 50,000 displaced workers as contact tracers so as to ease unemployment and to spur consumer spending. None of these happened.

Later on, statistics revealed that the increase in consumer demand was insignificant in Q2 and infrastructure spending actually contracted by 33% in Q3. As for the 50,000 contact tracers, well, we were told less than 5,000 have been hired.

This year, our economic managers have been at it again. The trio have been making the rounds of webinars proclaiming that the economy will grow by 6.5% to 7.5% in 2021 and between 8% to 10% in 2022. Again, they cite a spike in consumer demand, a ramp-up of infrastructure spending and an increase in OFW remittances. Almost in unison, economic think tanks from abroad as well as respected local economists debunked the forecast saying it was too optimistic, bordering on unrealistic.

The IMF published its forecast on the Philippines and pegged growth at just 6.6% in 2021 and 6.5% in 2022. Meanwhile, banking giant ING said that the economy could eke out growth of 6.5% in 2021 followed by a tepid expansion of 6% in 2022. Estimates of both financial institutions are significantly lower than government’s estimates for 2022.

Here at home, former NEDA Secretary Cielito Habito, opined that growth in 2021 will not exceed 5.5%. For his part, founder of the University of Asia & the Pacific and economic development author Bernie Villegas said that growth in 2021 will not exceed 4%.

Why is there a significant difference between the forecast of the government and everyone else? For those unaware, think tanks and professional economists use econometric models to forecast future trends, all of which are based on the same historical base data. The difference lies in the unforeseen variables imputed into the model. These include levels of new investments, trade activities, and consumption trends, among others. Government purposely skews its assumptions towards the best scenarios to paint a rosier picture in the hopes of it being self-fulfilling.

Much as I would like to be as optimistic, there are just too many factors that stand in the way of a quick recovery. Primary among them is the government’s vague and disorganized vaccination procurement and distribution plan. As we all know, herd immunity is vital to restore consumer confidence. It is also what is needed to revive certain sectors of the economy such as tourism, transportation, sports and entertainment, and services that require face-to-face interaction.

How far are we from achieving herd immunity? The Economic Intelligence Unit (EIU) provides the answer.

The EIU is a 75-year-old institution regarded as the world leader in business and economic intelligence. In a recent report, the EIU made its forecast as to when certain countries would achieve vaccination for 60% or more of its population. The analysis was based on the status of each nation’s vaccines procurements and the readiness of their logistics chains. Singapore and Taiwan are said to achieve mass vaccination by Q4 of 2021; Japan, South Korea, and Vietnam in Q2 of 2022; Malaysia and India in Q4 of 2022; Indonesia in Q3 of 2023; and the Philippines in Q4 of 2023, at the same time as Tonga, Bangladesh, and Samoa.

The findings of the EIU come as no surprise. Government’s handling of the pandemic was heavy handed, unscientific, impulsive, and muddled with political considerations. In fact, the Sydney-based Lowly Institute determined that the Philippines’ anti-COVID response to be the 79th most effective out of 98 countries evaluated. As usual, we lagged behind all our neighbors in the ASEAN.

While competent governments around the world spent the better half of 2020 preparing their logistics cold chains and mass vaccination plans, ours was preoccupied settling its petty revenge on ABS-CBN. While other governments used science-based testing, tracking, and curing protocols, ours imposed the world’s longest continuing lockdown with nary a scientific method. While other governments negotiated their vaccine procurement early on, ours did so belatedly and “mystifyingly” ended up with only one option — the Chinese-made Sinovac. It chose Sinovac even if it was the most expensive and with the least efficacy.

Other reasons why economist believe the next two years will be underwhelming include: the poor intake of foreign direct investments (it has been on a steady decline since 2017); government’s continued restriction of physical movement and retail activities; high unemployment and loss of productivity due the successive closure of large scale manufacturing plants (e.g. the Petron refinery, IMI Electronics in Cavite, Nissan Assembly, etc.); the continued closure of micro, small and medium enterprises and their inability to re-start; and, the high level of conservatism among banks and their hesitance to grant business and commercial loans. Of no help is the fact that the Department of Finance organized the smallest stimulus package in the region at just 5.88% of GDP.

The pandemic was an acid test of leadership and it exposed this government’s limitations. We are paying dearly for how the contagion was handled. Not only do we have to deal with one of the world’s most severe economic contractions, we also face the grim prospect of a long and hard recovery. It is a double whammy that will make us fall further behind the region’s development race. After being touted as Asia’s brightest star in the early part of the decade, we are back to being its sick man. Indeed, the fates of nations boil down to its leadership.

I speak for myself when I say I cannot subscribe to the excessively optimistic forecasts until the mass vaccination of our population is resolved. Only with mass vaccination and herd immunity can the economy run on all cylinders. Until such time, optimistic growth forecasts are but a smokescreen to mask the shortcomings of our leadership.

I would have expected our economic managers to be more pragmatic — more forthright with us all. They are our best and brightest, after all, and they know the real score. I can only surmise that they have to be team players and insulate this government from political blowback following this severe, self-inflicted, economic reversal.