…that’s if the recent surveyed data will be carried over to the government’s GDP.
Will Spiking M3 Save Merchandise Trade?
First, merchandise trade.
The Philippine Statistics Authority reported that exports rose by 9.4% and while imports recovered to grow by 10.5% last August. Merchandise trade (imports + exports) increased by 10.02%
Despite the 10.5% spike, imports for the first two months of the 3Q quarter tallied a 4% increase while exports grew at 10.2%. In the 2Q, the imports recorded a 5% growth while exports increased by 12.7%. So a slight slack exists in the current growth rates for both imports and exports compared to the 2Q.
The acceleration in M3, which at the August rate of 15.4% broke past the high in 2016, can be attributed to the surge in August imports. The BSP has been forcing up money supply via inflation targeting channeled through emergency policies. They have channeled these through the banking system and its monetization of National Government (NG) debt.
The implicit objective of such monetary policies has been to ensure that there would sufficient revenues to finance the NG’s boondoggles.
The jury is out as to whether the August surge in M3 will translate to a follow through in import growth. Present trends, however, could be indicative of a merely bounce from the ongoing softness in merchandise trade. (see topmost chart) Nevertheless, 2017’s January to August trade deficits have been almost shoulder to shoulder (lower left chart) with last year’s data which coincides with the weak peso (lower right chart).
Fierce competition for resources and for financing between the public sector and the private sector would signify as the initial symptoms of the “crowding out effect”. Such competition will be ventilated in real economy prices, financial markets and in fiscal and trade balances.
With domestic manufacturing drudging to recover in the face of spiking M3 growth, the likelihood is that import growth will continue to pick up steam. And that is in the condition that the private sector does compete.
In the case where private sector weakens, this would translate to the latter phase of such dynamic which evinces the government’s taking the upper hand in the economic contest.
Nevertheless, to finance a sustained widening of trade deficits, if dollar proceeds from OFW remittances and BPOs would prove to be insufficient, then external debt would likely expand.
According to the PSA, based on its October 2017 CURRENT LABOR STATISTICS, the biggest increase in the number of employed registered full-time workers in July was in the government sector which grew by 5.9% as against the private sector 1.9%. Laissez faire eh?
Manufacturing Travails: The Revenge of Economics II
Next manufacturing.
Based on recent statistics, the manufacturing sector will most likely signify a drag on the 3Q GDP.
The PSA’s August Industrial production index shows an increase of a measly 2.4% compared to July -2.0%. The bad news was that the sales index plunged 5.2% which should imply the furtherance of the production weakness in the coming months
Markit’s Nikkei PMI showed that September manufacturing hardly recovered from the sharp fall in August: (bold mine)
Subdued growth of the Philippines manufacturing economy persisted at the end of the third quarter, as output expansion slowed further. Order book gains continued to underwhelm relative to the historical trend, even as exports returned to growth, which weighed on hiring.
However, elevated business optimism encouraged firms to step up purchasing activity in anticipation of higher sales, which led to a further rise in input stocks. Meanwhile, cost pressures rose noticeably, prompting further price hikes from firms seeking to protect their margins.
The seasonally adjusted Nikkei Philippines Manufacturing Purchasing Managers’ Index (PMI™) stood at 50.8 in September, slightly up from 50.6 (a record low) in August, signalling only a marginal improvement in the health of the sector. The latest reading was the second weakest in the survey history September data showed that output volumes rose at the weakest rate since the survey started in January 2016 amid a modest sales trend. However, firms revealed that reduced overtime work and input shortages also contributed to the subdued expansion. There were also reports that rising costs for raw materials affected production plans.
Although order book volumes grew at a rate close to August, the degree of increase remained well below the historical average despite renewed growth in overseas orders.
Slowing order book growth enabled firms to work through their backlogs, where the level of incomplete work fell for a nineteenth month running. Firms also attributed equipment upgrades and improved systems for the drop. The ongoing lack of capacity constraints encouraged firms to use existinglabour resources for production
Employment shrank for a second straight month although the rate of contraction softened from August
The good news was that exports partially alleviated the sector’s dilemma.
Moreover, the continuing public optimism has brought about a divergence in the sector’s performance with that of the acquisition of input stocks. Manufacturing sales and output has decelerated, but optimism has impelled manufacturers to acquire inputs in expectation of improvements.
In reality, it is easy money that has brought about such public optimism. Businesspeople have come to believe that rising prices have been about economic growth, which changes in prices they could arbitrage and profit from, rather than from the side effects of credit expansion.
With manufacturers loading up on supply inputs from optimism, prices rose. And since “cost pressures rose noticeably”, this has prompted for “further price hikes from firms seeking to protect their margins”. And higher sales prices will likely slow demand. The ramifications of higher costs in the face of slow demand will not only be compressed profits but a glut of inventory (inputs and products for sale).
Yes, dear readers, another prospective case of oversupply.
BSP’s loans to the manufacturing sector grew at 13.05% in August and 12.3% in July. Such acquired bank loans could have been used to store up inputs.
As one can see, these are the products of the BSP’s easy money.
Again, the PSA’s data was for August. Nikkei’s data was for September, which means that the PSA’s September PPI prices must have turned positive to reflect on “cost pressures rose noticeably”.
And considering that manufacturers increased sales prices, aside from slowing sales, this would transmit into as higher wholesale prices, which eventually should diffuse into price pressures on the retail side. And asprices rise, projects will suffer cost overruns, profits will be crimped, and consumers will endure constricted disposable incomes.
The BSP believes that by forcing up real economy prices through its inflation targeting, it can juice up revenues for the national government. Thanks to their policies, economic strains have resurfaced. And despite optimism from easy money, the private sector has gradually been feeling the pain. Unfortunately, the public has little understanding of the roots from whence their angst has come to haunt them
Back in September I wrote*
Bottom line: Distort prices (by monetary inflation), prices get back at you!
The revenge of economics!
*OFW Remittances, Merchandise Trade and Industrial Production (The Revenge of Economics) September 17, 2017
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