That dreaded R word

BY ALL INDICATIONS, the Philippine economy is already in recession. With last week’s announcement of an insignificant 0.4-percent first quarter growth in the economy, government statisticians forthrightly described the economy as “teetering into recession.”

What they really meant is that based on the technical definition of the word—i.e., two consecutive quarters of falling output or negative growth—we are on the way to being officially in one. But how so, when the economy’s growth was still reportedly positive?

Already negative

Well, it’s positive only if you reckon the growth on a year-on-year basis; the announced figure gives how much the economy grew from the first quarter last year to the same period this year. But other countries commonly report their GDP growth as an annualized quarter-on-quarter growth, after adjusting for seasonal effects, as this better reflects current trends.

Measuring GDP in this manner (i.e., from Q4-2008 to Q1-2009), our economy already shrank 2.3 percent, or nearly 10 percent on an annualized basis. This is its worst performance over the last 20 years. To be officially declared in recession, we just need another quarter of negative growth.

Note that we are already two months into the second quarter, and it certainly doesn’t feel like the economy has gotten any better. No one would be surprised if the government announces negative growth for the second quarter. In fact, I would bet my hat on it.

The reason I could be so sure is that none of the sources of demand for the economy’s products—personal consumption, government consumption, investment and exports—can be expected to grow enough to forestall an overall drop in spending and, therefore, production.

Consumption dives

What’s driving our economy into negative territory?

On the demand or spending side, the most telling indication is that Filipinos in general have suddenly cut back dramatically on consumption spending. This fell 3.1 percent quarter-to-quarter, or more than a 12-percent dive on an annualized basis.

Even the still-positive 0.80-year-on-year growth reported is a drastic departure from the brisk 4- to 6-percent growth we had been averaging in recent periods, even up to the last quarter last year.

Such brisk consumption spending has popularly been attributed to large remittance inflows putting purchasing power in the pockets of large numbers of Filipinos.

But wait: Didn’t the Bangko Sentral just recently report that the country saw an all-time record remittance inflow of $1.47 billion in the month of March 2009 alone? What gives?

The latest consumption data gives credence to the hypothesis that the March remittance record could have been a one-time surge due to the repatriation of accumulated savings by OFWs who have been forced to come home for good.

More negatives

Compared to the consumption drop, the other negative numbers on the spending side are no surprise. Investment (aka capital formation) fell by a steep 16.5 percent, which even a hefty 17.3-percent growth in private construction could not dampen. This is because government construction fell 4.4 percent, and investment in durable equipment fell 17.9 percent. And these are year-on-year numbers. The quarter-on-quarter declines must have been even steeper (i.e., once annualized).

Exports were down 18.2 percent, worsening the previous quarter’s 11.5-percent drop. BSP’s latest figures show a 75-percent dive in foreign direct investments. Given the ongoing global recession, we can rule out any growth in foreign demand for a while to come.

Government consumption posted a positive 3.8-percent growth, probably reflecting the boost in cash subsidies given away in recent months. But this item only represents 7 percent of GDP spending, so will do little to offset the other large negatives. The problem is that government is quickly losing its spending leeway.

Just four months into the year, it has already racked up P111.8 billion of fiscal deficit, already more than what it had originally targeted for the entire year. And a runaway deficit could only mean more debt, and a return to a heavy debt service bill in the years ahead at the expense of vital government expenditures.

I haven’t even begun to discuss the production side of the economy, where things are clearly heading south—and I’m not talking about Mindanao. The long and short of it: Hold on to your seats, recession is here.–Cielito Habito, Philippine Daily Inquirer

Comments welcome at chabito@ateneo.edu.