In this issue
Vital Signs from Expenditure 2017 GDP: Bye Bye Consumers, Welcome Big Government; Automobiles Dominate Capital Spending and Bloomberry shares as Giveaway!
-The Current Imbalanced Consumer Based Economy
-Government Footprints on Bureaucratic and Welfare Expenditures and on Public Works
-Capital Investments Has Largely Been in the Transport Sector
-Shifting Transport Investments via PUV Modernization? RA 10963 as Anchor to Big Government
-The Effects of the State-Corporatist Economy II
-Money for Nothing! Bloomberry Shares For Free!
Vital Signs from Expenditure 2017 GDP: Bye Bye Consumers, Welcome Big Government; Automobiles Dominate Capital Spending and Bloomberry shares as Giveaway!
If the government’s national account statistics has a facsimile of accuracy, then we are witnessing a vital shift in the structure of the domestic economy
The Current Imbalanced Consumer Based Economy
It barely has been about a transition from consumption to investment. Instead, indicators suggest a shift from the private sector (consumption) to a bigger statist government (consumption).
This chart, which I have previously shown, signifies the current hallmark of the Philippine economy: the consumption economy.
However, rather than keeping pace, intense competition has driven capacity growth buildup faster than the ability of the consumers to spend.
As a matter of technicalities, comparing household spending, an expenditure account, with trade and real estate, an industry account, would seem apples-to-oranges.
That’s because the opposing direction signifies the relative growth rate of these factors in comparison with the other variables within its category. In the expenditure account, the general variables are household, government, capital formation and merchandise trade. In the industry account, these are the agriculture, industry, and services. Thus, the growth rates affect the share distribution of variables within their respective class domain.
However, irrespective of the categorization, GDP numbers for both expenditure and industry are the same. The purpose of the national account data is to exhibit the direction of expenditures and its distribution through its varied industries
Therefore, there is no ambiguity in the comparison of household spending activities to specific groups in the industry accounts.
Having said so, the contradictory directions of such activities embody mounting economic imbalances exhibited through excess capacity in specific industries
In details, for the year 2017, (real or inflation-adjusted) trade and real estate grew by 7.1% and 7.5% respectively, while household spending expanded by 5.8%.
Just how can these be?
Given that the products of both sectors compete with each other for household’s peso, the supreme paradox is the marked differentiation in the statistical performance of household spending relative to where it spent - or the industry or industries where money had been allocated or spent.
Government Footprints on Bureaucratic and Welfare Expenditures and on Public Works
Nevertheless, to have a better insight, we’ll move to account for the specifics in the expenditure aspect of the GDP
Because government spending and capital formation have grown faster over the years, the household consumption share has deteriorated.
In 2017, HFCE’s annual share was 68.74% which is lower compared to the 69.31% share in 2016. Government expenditures marginally rose to 10.52% from 10.46%. Capital formation also eked up slight gains to 28.61% from 27.99% in 2016.
Since net exports were both negative in 2017 and 2016 these were deducted from GDP.
For a clue to what has driven the government spending
I quote the PSA in the 4Q (bold added)
GFCE expands to 14.3 percent in the fourth quarter of 2017, surpassing the 4.5 percent growth in the same period last year. The increase resulted from the release of year-end bonus and cash gift of government employees, the release of performance-based bonus of some agencies, the filling up of government positions.
The expenditure in the relief works and operations in Marawi, the school operating expenditures, purchase of drugs and medicines, and the payment for completed ASEAN-related events also contributed to the expansion of GFCE.
The 3Q
Government Final Consumption Expenditure accelerated to 8.3 percent in the third quarter of 2017, which is faster than the 3.1 percent in the same period last year. The increase resulted from the disbursements for social protection programs, the filling up of government positions, and the implementation of the second tranche of the salary adjustment based on Executive Order No. 201, series of 2016, which increases the base pay of civilian, military, and uniformed personnel.
Outside of ad hoc expenditures, growth in government spending in the last half of 2017 had been mostly about expanding the bureaucratic organization, increases in benefits and wages of government employees and social welfare spending
So the National Government (NG) can be seen here as expanding its size.
On the other hand, capital formation has rapidly expanded.
Construction activities are also part of the expenditure account. Construction represents a subset of fixed capital.
However, as earlier noted, public sector construction has grown at the expense of the private sector. Think of it this way: A construction crane used in public sector projects is the same construction crane that will NOT be used in the private sector. Hence, private projects are the opportunity costs of public works
Last year, the sizeable pick up in public sector’s growth was inadequate to support the entire industry.
Nevertheless, while the ambitious “build, build and build” projects may boost parts of the construction industry, what it does is to redistribute resources and funding towards politically-directed activities.
Hence, bigger expenditures will arise from increases in public works and ancillary projects. Not only that, the bureaucracy will expand as well. After all, who would do all the regulating and controlling of both direct and indirect (Public Private Partnerships PPP) projects?
Bureaucratic expansion implies an increase in manpower and logistics to support implementations of political projects.
Who says public works are for free?
Capital Investments Has Largely Been In the Transport Sector
The other major variable in the expenditure account is the durable equipment which has consistently outperformed.
So what has pushed up the share of durable goods over the recent years? In two words: Transport Equipment (48.08% share in 2017).
Fundamentally, road vehicles constituted 44.63% share of the durable equipment GDP or 92% of the transport equipment account in 2017. Transport equipment share was lower in 2017 from 49% in 2016
That said, transport investments accounted for close to 50% of durable equipment GDP since 2011.
At the same time, while transport investments improved, the capital investments have slumped in specialized machinery 19.72% in 2017 from 20.6% in 2016 and in general machinery 15.23% from 15.4%.
Specialized machineries have been in a steady downtrend since 1999. On the other hand, general machinery investments growth has fluctuated in a range of 13-16% since the new millennium.
Meanwhile, miscellaneous equipment increased to 16.97% in 2017 from 15.1% 2016. This year’s growth marks the first improvement which has steadily declined since 2011
The overall Expenditure GDP picture tells us that capital goods investments have mainly been about transport equipment and have been lessabout the other forms of capital.
Shifting Transport Investments via PUV Modernization? RA 10963 as Anchor to Big Government
And the capital formation dynamic may be about to change too!
With the institution of RA 10963 or the Tax Reform Acceleration and Inclusion Act, higher excise taxes on private sector transport, as well as, in the fuel prices are likely to affect the economics of the transport industry.
Should higher prices reduce demand, this will resonate with diminishing investments in transport equipment.
Nevertheless, a response has been prepared by the NG. The Public Utility Vehicle (PUV) Modernization Program estimated to cost around P417.3 billion over the next five years will come into action.
So the government again will most likely take over “investments” in the transport sector.
See? RA 10963 had been furtively engineered to expand the NG’s control over the entire economy!
By the way, the new tax regime is not a sign of federalism or advancement of “state rights”, but of “centralization”.
So household consumption will be replaced by government consumption
As I earlier wrote, We are seeing and will see a vastly bigger government.
[Build, Build, and Build: Construction GDP Growth in the 4Q and in 2017 Slipped to 2013-2014 Lows! More on Infrastructure Risks and the Path to Big Government January 29, 2018]
The writing is on the wall.
The Effects of the State-Corporatist Economy II
Yet the transition to an economy driven by state-corporatism (cronyism) will aggravate existing imbalances, distortions, and malinvestments in the system.
As Richard Salsman wrote in Forbes, “Corporatism goes hand-in-hand with statism, with abandonment of the fully free economy and adoption of the welfare-warfare state”
Interestingly, since the main street and the stock market have gone gaga over consumer-related industries, imbalances should accelerate as an avalanche of money flows will be directed to these sectors.
The supreme irony is that the NG will take a substantial cut in the household and private sector consumption. Additionally, it will divert part of resources and funds away from these.
Moreover, the new tax and spending regime will exacerbate the embedded distortions from zero bound rates. Such combination would have a significant unseen (by the mainstream) impact on the real economy prices, interest rates and the peso.
Largely ignored by everyone is that the inflation tax and price instability from these policies will gnaw deeper on the financial conditions of both the consumers and small and medium enterprises.
Worst, the increased politicization of the economy extrapolates to the substitution of economic incentives from servicing the consumers to servicing political agendas. The evolution implies reduced free markets activities that would support taxes to finance aggressive and spendthrift political projects.
If the NG has been trying to expand its presence under a free money regime, what more if such free money bonanza ends?
Money for Nothing! Bloomberry Shares For Free!
Oh speaking of free money and going gaga, here is a striking development: equity shares now serve as marketing giveaways to patrons of a casino!
From Nikkei Asian Review:
Bloomberry Resorts will reward its loyal patrons with shares in the Philippine casino company.
The resort operator on Tuesday said it had been authorized by management to buy up to 2 million shares at prevailing market prices. "These shares shall be given as a reward to Solaire's loyal patrons and as part of Solaire's marketing program," a statement says.
The company has already purchased 382,90 shares valued at 4.24 million pesos ($83,000).
Translation: If you lose money, our shares will compensate for it. But if you win, you win both from bets on casino games and from our shares. It’s a win-win proposition! Gamble with us!
Now falling prices wouldn’t be an effective enticement, would it?
The takeaway: Because free money is seen to last forever, shares are being given away!
Such marks a historic (manic) sign of times!
