We are not out of recession

by Cielito F. Habito, 17 Aug 2021

There was misplaced jubilation over the 11.8 percent second quarter increase in our GDP that the Philippine Statistics Authority (PSA) recently announced, as it gave the wrong impression that the Philippine economy is now out of recession. Unfortunately, it is not. As others have already pointed out, including fellow Inquirer columnist Winnie Monsod and yesterday’s main editorial, the seemingly impressive growth rate was merely the result of what statisticians call the “base effect.” That is, the percentage growth came out of the comparison with a greatly shrunken GDP one year ago, making it illusory and misleading.

The economy didn’t grow over the past quarter; the truth is, it actually shrank. Expressed in constant 2018 prices (to eliminate the misleading effect of rising prices) and adjusted for seasonality, our second quarter (April to June) GDP of P4.468 trillion was smaller than the P4.528 trillion posted in the first quarter (January to March). That’s a negative quarter-on-quarter growth rate of -1.3 percent. Our economy’s aggregate output and incomes actually took a turn for the worse in the first half of 2021. It is thus wrong to believe that our economy is out of recession and is seeing rebounding growth.

The issue lies in how GDP growth that is measured year-on-year—comparing a quarter’s performance with that in the same quarter a year ago—can be misleading given the highly abnormal situation we had last year due to the pandemic-induced lockdown. More advanced economies typically announce and focus on the annualized quarter-on-quarter, seasonally adjusted growth rate, as it depicts the more current real-time pace of the economy. In our case, the figure always prominently reported is the year-on-year growth rate, hence highly subject to the base effect. But at times like this, it’s a purely arithmetical result of computing the percentage growth on a reference base figure that is unusually low, as it was in Q2-2020.

Let’s examine our numbers more closely on this basis. Recall that at the worst of our lockdowns in the second quarter last year, GDP was reported to have been 17 percent lower than in the same quarter of 2019. Against the preceding quarter (Q1-2020) and adjusted for seasonality, the PSA says it was 15.1 percent lower. While the PSA, as always, also reported that number then, hardly anyone took note. Annualized, that translated to a negative 75.51 percent, a huge contraction. No wonder we still feel the effects of that now.

The technical definition of a recession is two or more consecutive quarters of negative GDP growth, or falling production and incomes. Our quarterly GDP levels corrected for inflation and seasonality fell in the first and second quarters last year, so we were indeed officially in recession then. But the decline actually ended as early as the third quarter, when our quarterly GDP level turned upward again as lockdowns were eased, and continued rising until the first quarter of this year. It was only in this past second quarter that GDP fell again, as already noted earlier. If the quarterly GDP level continues to drop in the third quarter from where we were in end-June, then we would officially be in recession again. And given how the Delta variant of the COVID-19 virus has led to renewed lockdowns, such quarter-on-quarter drop in GDP is almost a foregone conclusion. We are, in short, in a double-dip recession forming a W-shaped graph.

A recent article in Forbes magazine gives a better definition of recession that we could all better relate with. It says that a recession is when “the economy struggles, people lose work, companies make fewer sales and the country’s overall economic output declines.” Indeed, we should be looking well beyond GDP as we assess whether our economy is on a rebound. I use my own “PiTiK” test that focuses on presyo, trabaho, and kita. Are prices regaining stability with a declining inflation rate? Are jobs back on a sustained uptrend?

With a resurging pandemic in our midst, it’s quite clear that we cannot declare ourselves out of recession just yet, and that government must move like we’re in the middle of one.

cielito.habito@gmail.com