2Q and 1H GDP: What Happened to the Domestic Consumers? Government Spending and GDP Deflator Saves the Day!

The real trouble with this world of ours is not that it is an unreasonable world, nor even that it is a reasonable one. The commonest kind of trouble is that it is nearly reasonable, but not quite. Life is not an illogicality; yet it is a trap for logicians. It looks just a little more mathematical and regular than it is; its exactitude is obvious, but its inexactitude is hidden; its wildness lies in wait.—Gilbert K. Chesterton, The Paradoxes of Christianity

In this issue

2Q and 1H GDP: What Happened to the Domestic Consumers? Government Spending and GDP Deflator Saves the Day!

-By Industry Account: Positive Quarter on Quarter Growth from Only Four Areas: Public Administration, Agriculture, Mining and Electricity

-By Expenditure Account: Government Final Expenditures Buoyed 2Q GDP!

-What Happened to the Domestic Consumers? Dramatic Decline in Growth Rates and in the Share of GDP!

2Q and 1H GDP: What Happened to the Domestic Consumers? Government Spending and GDP Deflator Saves the Day!

First, the statistical data I used here can all be accessed or downloaded from the following government sites: Philippine Statistics Authority (PSA) National Accounts: Time Series, the Bangko Sentral ng Pilipinas (BSP) Financial System Accountsand the Bureau of Treasury (BoTr) National Government Cash Operation Report. This allows readers to see the entire series and or construct charts for one’s interpretation.

Two, I made a guess on the likely outcome of the 2Q GDP predicated on the following conditions*.

Government revenue growth has been down sharply (Tax and Non-tax 2Q: +3.54%; BIR + BoC 2Q: +5.51%).

Based on the performance of major cement manufacturers - HLCM, CHP and Eagle which topline were significantly lower – extrapolates to slower construction activities.

Net income, EPS and gross revenues of listed firms have lagged previous performances.

Car sales have materially slowed in the 2Q (although this jumped back to 23.3% last July).

2Q external trade grew by 7.18% about half the rate in 2016 at 15.19%. In line with exports, manufacturingconditionshave substantially cooled.

With General Retail Prices and the CPI in considerable deceleration, perhaps consumer spending could be lower.

Most importantly, money supply growth has been moderating. 2Q M3 growth was at 11.9% down from 12.03% in 1Q and 12.73% in the 4Q of 2016. M3 has coincided with real GDP (RGDP).

So GDP should be mostly lower, if not at the current rate.

*PSEi 1H Net Income Performance LOWER than CPI Rates! Will There Be GDP Week Pumps? Huge Decay in Market Internals! August 13, 2017

Through the PSA, the National Government (NG) announced that the headline 2Q GDP improved by a notch to 6.5% from 6.4% in the 1Q. However, first semester GDP dropped to 6.4% from 7.0% over the same period in 2016. The 1H 2017 number would signify a substantial -8.6% decline relative to 2016!

To balance the perspective, the 2Q GDP report essentially REINFORCED most of my hunches.

By Industry Account: Positive Quarter on Quarter Growth from Only Four Areas: Public Administration, Agriculture, Mining and Electricity

The quarter on quarter gains by the 2Q GDP had fundamentally been limited to a few sectors. 

By industry origin, on a nominal basis or based on current prices, of the three major industries only the agricultural sector registered gains in growth differentials (11.9% 2Q as against 9% in 1Q).

Growth differentials for the services and industry were down -.7% (9.0% in 2Q compared to 9.6% in 1Q) and -.3% (8.4% in 2Q and 8.7% in 1Q), respectively.

By industry, the mining sector’s fantastic growth surge of +25.6% in 2Q from +3.2% in 1Q which had been helped by the 5.5% 2Q growth of the electricity, gas and water supply from 1Q’s 4.4% had hardly been enough to offset deficits suffered by the construction (9.3% 2Q, 12.1% 1Q) and by the manufacturing sector (7.8% 2Q, 8.6% 1Q).

By services, only the Public Administration & Defense registered positive differentials (12.9% in 2Q as against 10.7% in 1Q).

Of the major components, trade (9.6% 2Q, 10.6% 1Q), real estate (9.1% 2Q, 9.6% 1Q) and financials (9.4% 2Q, 10.3%) were all down.

Thus, with a cumulative 16.7% share of the Nominal GDP, four sectors, namely, the agriculture, mining, electricity and public administration registered quarter on quarter improvements.

Part of such decline appears to have been manifested in the PSEi 30’s cumulative net income which suffered a 3.57% contraction in 2Q. 2Q’s deficits led to the PSEi’ 30s net income growth of a puny .15% or FIFTEENTH of ONE percent for the first semester.

And one more thing, despite the political disrepute, the mining sector has made a considerable leap.

Here is a prediction: The mining sector will eventually outperform the mainstream sectors where the latter will suffer from sharp downturns. And once government’s revenues come under pressure, doors will open to the once politically incorrect industry. And don’t forget, the BSP’s gold stash, as declared in their GIRs, come mostly domestic gold producers.

By Expenditure Account: Government Final Expenditures Buoyed 2Q GDP!

By expenditure type, positive growth quarter on quarter differentials occurred in government final expenditures which recorded one of the biggest jumps (10.2% from 3.4%).

Though most segments of capital formation which included durable equipment (20.7% from 15.5%), breeding stock & orchard (12.1% from 11.5%) and Intellectual Property which growth zoomed by 41.3% from 9.4% were positive quarter on quarter, the gaping drop in construction 9.5% 2Q compared to 13.6% 1Q led to capital formation’s shortfall (15.6% 2Q, 16.6% 1Q)

 

From the PSA: “Investments in Construction grew by 7.3 percent in the second quarter 2017, slower compared with the 17.9 percent growth in the previous year. Private Construction, which accounted for 63.3 percent of total construction investments, grew by 4.7 percent, slower compared with the 10.8 percent growth in the same period in 2016. Meanwhile, Public Construction grew by 12.0 percent, slower compared with the 33.5 percent growth in 2016.” The cited numbers above have been adjusted for inflation based on 2000 prices.

Public construction peaked in Q3 of 2015 at 54% then headed south from then. Although 2Q real public construction improved from the 2Q, as noted by the PSA, it was down by two-thirds compared to the same period last year! The “build, build, build” infrastructure boom has YET to make its grand appearance!

Interestingly, private sector construction, which mostly has determined total construction, peaked in Q3 2016. Ever since, unfortunately, its rate of growth appears to have faded. In tandem, the slowdown has affected the GDP headline numbers.

Interestingly, the travails of the construction industry have reverberated with the cement industry’s recent dilemma.

As an aside, I would pick a nit with the GDP numbers based on cement industry’s performance.

Cement sales by Holcim, Cemex and Eagle plunged by 13.61% in the 2Q and 11% for the first semester as previously discussed. [Cement Industry’s 2Q Crash: The Numbers; Wild GDP Week Pumps in Motion, BSP Intervenes in the USD Peso?August 16, 2017]

In addition, the government’s measure of cement wholesale prices had been up by a paltry .1% year-on-year in April, down by .7 in May and lower by 1.8% in June or an average of -.8% for the 2Q.  

Through the fundamental law of demand and supply, the financial conditions of major cement producers have validated the 2Q recent price dynamics.

Hence, it would be difficult to conceive of the given 2Q growth numbers of (current) 9.5% or (real) 7.3% as a manifestation of actual performance. That would be unless there would be other major factors that would offset the drudgery affecting the cement industry which serves as one of the major indicators for the construction industry

Statistics is not economics.

On external trades, only imports of services posted quarterly advances: 11.8% in 2Q from 6% in 1Q.

Outside imports of services, government final expenditures and the abovementioned components of capital formation have accounted for 24.25% share of the expenditure-based Nominal GDP.

2Q and 1H GDP: Primarily About National Government’s Real World Activities and Statistical Massaging

So far, it would look as if that the underperformance by the private sector had largely been covered, filled or substituted by the government’s activities.

The NG’s 1H fiscal deficit to the tune of Php 154.5 billion, the second largest since 2010 appears to corroborate the government’s GDP account.

 

Moreover, the gap or discrepancies between the published growth rate of NG’s revenues and the Nominal GDP has been widening astoundingly since 2016!

Again, either such imbalances may about the government’s embellishment of the statistical GDP or that leakage in the tax collection system has been burgeoning. It could even be a mixture of both!

And besides, 2Q Nominal GDP at 9% was lower than 1Q’s 9.3%. Hence, through the GDP’s price deflator adjustments (2.5% 2Q vis-à-vis 2.9% 1Q); lower price inflation represented the second key factor in the elevation of the 2Q’s headline GDP

Last week when I offered my story of the 2Q GDP, I added

But remember, GDP is a government construct mostly anchored on surveys. So political considerations may have a hand in determining the GDP. The government can produce whatever numbers they wish for the public to see, since hardly anyone would question the validity of the numbers. And or surveys can be vastly optimistic.

Well, there it was.

From both the industry and expenditure aspects, the substantial increases in the government’s activities played the lead role in the shaping of the 2Q GDP.

Even more, the headline GDP was a consequence of the arbitrary price deflator (implicit price index) adjustments

The PSA described of the sensitivity of the CPI in affecting government’s economic data: “The CPI is most widely used in the calculation of the inflation rate and purchasing power of the peso. It is a major statistical series used for economic analysis and as a monitoring indicator of government economic policy. The CPI is also used to adjust other economic series for price changes. For example, CPI components are used as deflators for most personal consumption expenditures (PCE) in the calculation of the gross national product (GNP).” (bold added)

Thus, 6.5% 2Q GDP was PRIMARILY about the government: government activities in the real world and government activities in crafting economic statistics through the interjection of arbitrary numbers.

But since the government has no funds on their own but essentially depends on resources from the private sector, then its expanded activities will come at the expense of the latter through the crowding out effect.  

So what seems as substitution today, in the form of elevated statistical growth or the headline GDP, would represent costs tomorrow (higher inflation, taxes and debt, and lower standards of living).

Hence, today’s pressures signify as products of the past policies.

What Happened to the Domestic Consumers? Dramatic Decline in Growth Rates and in the Share of GDP!

Curiously, the vaunted Filipino consumers were in hibernation for TWO straight quarters!

Let us hear it from the PSA: “The household expenditure grew by 5.9 percent in the second quarter of 2017. This wasslower than the 7.5 percent growth in the same quarter of 2016. Food and Non-alcoholic Beverages, sharing 41.2 percent of the total household expenditure, decelerated to 6.0 percent compared with the 7.4 percent growth recorded in the previous year. Miscellaneous Goods and Services, the next top contributor of HFCE, grew by 6.2 percent. This was slower than the 7.7 percent in 2016. Aside from the abovementioned expenditure items, the other top contributors to the growth of HFCE were: Housing, water, electricity, gas and other fuels, 6.6 percent growth; Transport, 7.6 percent, compared with the 10.8 percent growth posted in the previous year; and Restaurants and hotels, 11.4 percent, compared with 9.0 percent of 2016. On the other hand, Recreation and culture pulled down the growth of HFCE with 1.1 percent decline compared with 14.8 percent growth posted in 2016.” (bold added)

 

First, a decline from 7.5% to 5.9% translates to a contraction of 21.33%.  A 21% drop represents a slowdown or a crash?  

So if the government’s numbers are accurate, then this should put the retail industry in the spotlight.

Second, though the government’s measure of household spending has been in a downshift since 3Q of 2016, real Household Financial Consumption Expenditure (HFCE) growth rate at below 6% occurred in two straight quarters of this year.

The last time such low level of HFCE growth rate had been reached was in 2014- 2015.

Will the past serve as a likely blueprint for the future?

It was no coincidence that the last time HFCE declined, retail vacancies at shopping malls emerged.

As a refresher, HFCE’s decline in 2013-2014 the emerged in the milieu of the money supply growth surge which came at a striking rate of 30%+++ for 10 straight months (2H 2013- 1H 2014). Such extensive monetary inflation percolated into the real economy through rising prices. The BSP responded to these by partial tightening in the 2Q and 3Q of 2014.

And because of profits or earnings consideration, a slowdown in consumer spending affects retail operations with a time lag.

Hence, the first appearance of mall vacancies occurred in the 1Q 2015, or about a year from the HFCE’s climax in 2H 2013 to 1Q 2014 (lower pane figure 3).

Will the next wave of retail vacancies resurface in 4Q 2017 or in 1Q 2018????

Lastly, other than a fatigued consumer, the PSA’s data provided an eye-opening development: the corrosion of the consumers’ role in the GDP

The HFCE recorded a 66.17% share of the real GDP in the 2Q. This number was strikingly lower from 69.43% in the 1Q this year. And I traced back the entire HFCE series to discover that the current reduced share of the GDP was not an anomaly but an unfolding trend.  

Though the HFCE’s share of GDP peaked in 4Q of 2004 at 75.39%, the real decline commenced from about 2010. That’s about a year since the BSP embarked on its accommodative zero bound policy.

And such corrosion has emerged even as real yoy HFCE growth levels have significantly increased compared to the pre-Lehman crisis.

Since the GDP constitutes a statistical economic pie, naturally, HFCE’s lost share amounts to increasing shares of other variables elsewhere.

The rising share of construction and durable equipment contributed to much of the early decline in the HFCE. Since both the construction and durable equipment incorporates the government, the latter includes military equipment, then expansion in government activities have contributed to downscaling of the consumers. The increased government activity can be construed as the “crowding out” effect in motion. 

How much more when the ambitious spending on the welfare (e.g. free tuition) and warfare state (more military equipment), bureaucracy and infrastructure programs become a reality?

The outgrowth in imports has also contributed to the current dynamic. The import share of GDP has significantly risen since the peso began its decline in 2014.

Through imports, the falling peso contributes to consumer price pressures which erode the household’s real disposable income. And this reduction in the consumer’s purchasing power has reduced the consumer’s share of GDP.

And since industrial production and investments have likewise been affected by the peso’s instability, much of domestic supply had to be imported.

So the domestic economy has become more reliant on imports based on the ongoing credit financed frantic race build supply, as well as the increasing role of the government in the economy

Thus, the enlarged share of imports will compound or exacerbate the present USD dollar liquidity stains in the domestic financial system.

The remarkable intensifying degree of imbalances in the Philippine economy has been demonstrated in the GDP data.

In previous outlooks, I presented such misdirection of resources through the GDP’s industry side; particularly, the rising share of retail, construction and real estate.

Under the expenditure side, the outpacing of growth in construction and durable equipment, which comes at the expense of the consumers, showcases the context and scale of such misallocation of resources through diversion.

Moreover, through imports, the build-up on the expenditure side self-reinforces the peso’s weakness.

And fascinatingly, economic and financial pressures have resurfaced even as the BSP remains in emergency easing mode or have embraced policies that have reached unprecedented levels (interest rate) and uncharted proportions (debt monetization).