Metrics are always always gamed: a politician can load the system with debt to “improve growth and GDP”, and let his successor deal with the delayed results—Nassim Taleb
In this issue
3Q GDP: Record Fiscal and BOP Deficit Equals Rapidly Expanding Government Share of the Economy
-3Q GDP Reinforces the March to a Neo-Socialist State and the Trend of Economic Entropy
-Expenditure GDP Boosted by Government Spending, Public Construction and Government Influenced Imports
-Industry GDP: Vibrant Government Sectors as Race to Build Supply Industries Struggle
3Q GDP: Record Fiscal and BOP Deficit Equals Rapidly Expanding Government Share of the Economy
3Q GDP Reinforces the March to a Neo-Socialist State and the Trend of Economic Entropy
3Q GDP confirms only two forces:
One, the deepening march toward a neo-socialist state
The actual public spending to NGDP ratio is 19.96% which is slightly lower than my earlier estimates of 20.15%. Nonetheless, it still is at the highest level since at least 1998. Even more, the ratio registers the biggest bps increase annualized with a quarter to go!
Rising Risks of a Fiscal Crisis: Record Public Spending Share to GDP! BIR Revenue Plunged 8% in September! Public Debt Servicing Costs Rockets! October 29, 2018
3Q GDP incorporates both estimated direct and indirect exposure of the government to the economy.
Second, economic growth has been on a long-term downtrend.
Figure 1
The government’s data reveals that PER CAPITA GDP has been on a steady declining trend since 2013, a pre-Duterte era, which has coincided with the BSP’s phenomenal combustion of money supply growth. (figure 1, upper window)
Since Mr. Duterte assumed office, PER CAPITA Household consumption headed south with an acceleration in its decline since Q4 of 2017.
Per capita means per person. So PER capita GDP and Household consumption mean economic and consumption growth per person.
SSShhh.
That is because GDP is supposedly about an entitlement to feel good numbers than for any serious vetting of the economy. Such is why the consensus will keep on missing growth forecast, as the 3Q, because they have been programmed to see trends in one direction: upwards!
And such is also because convenient mendacities spur invisible wealth transfers from gullible savers to cunning and covetous vested interest groups. The asymmetry in power distribution provides free lunches to the latter!
Last week, I asked, “And does the decline in both bank lending growth rate and M3 presage GDP lower than consensus estimates?”
Falling Rates of Bank Lending, Liquidity, and Government Revenues Point to 3Q GDP Lower than 6%, What Policy Tool Remains to Combat Hissing Bubbles? November 4, 2018
Well, the answer is yes!
Though the 2Q GDP of 6% was my benchmark, its upside revision to 6.2% necessitated a corresponding adjustment on my target too
Thus, without the use of fancy and presumptive econometrics, declining bank loans, M3 and tax revenues foretold of a weaker 3Q GDP of 6.1% marginally lower than the 2Q! (figure 1, lower window)
Expenditure GDP Boosted by Government Spending, Public Construction and Government Influenced Imports
And the GDP has become more dependent on the government’s contribution.
Figure 2
From the expenditure side, with real government consumption growing at an accelerating rate of 14.3% in the 3Q, real consumer spending continued with its cascading trend with 5.2% growth. Government consumption grew by 11.9% and 13.6%, while consumer spending increased by 5.9% and 5.7% in the 2Q and 1Q respectively.
The Socioeconomic Planning Secretary Ernesto Pernia reportedly attributed the downturn in household consumption as havingbeen “dampened by high prices as inflation soared to 6.2 percent in July to September”, in particular, “With high prices, the demand tends to be dampened. Especially food prices remain to be elevated,” he explained, adding that if not for the high inflation, growth would have been within the 6.5 to 7.0-percent range.”
So increases in general price levels of the economy, as a result of the contribution from intensifying government spending through record fiscal deficits, took its toll on the consumers!
The statement signified a stunning implicit admission of the government’s ravaging of the consumer’s purchasing power!
In the meantime, the real growth rate of capital formation slowed to 16.7% in the 3Q from 21.4% in the 2Q.
Construction (14.8% in 2Q and 13.6% in 2Q) boosted fixed capital (16.5% and 21.2%) while the other major component durable equipment (17.5% and 28.2%) decelerated substantially. Growth of all classes of durables softened markedly, in particular, specialized machineries (14.6% and 34.1%), general industrial equipment (9.4% and 17.3%), transport equipment (23.7% and 33.9%) and miscellaneous equipment (1.6% and 18%). Air transport (+287% and 20.7%), probably from PAL’srefleeting, and aircon & refrigeration (23.% and 18.4%) were the only major components that bolstered durables materially.
The slack in 3Q capital expenditures bodes ill for FUTURE GDP. Up to what extent has price instability spurred the reduction in capital expenditures?
To consider, portions of durable expenditures are from the government or influenced by them, e.g. Road vehicles, agricultural and construction machineries and etc.
Its slowdown may imply that “build, build and build” have consumed the budgets of other government expenditures.
What has boosted expenditure GDP has been merchandise trade which improvement for the quarter partly offset declines in consumer and fixed capital.
Export growth jumped 14.3% in the 3Q from 12.6% in the previous quarter while imports sizzled at 18.9% from 18.5%, respectively.
The outgrowth in imports over exports has contributed both to record trade and balance of payment deficits.
So from the expenditure side, government spending, construction and external trade were the principal growth factors that contributed to the 3Q GDP. Aside from direct spending, construction and imports are activities connected with the government.
Industry GDP: Vibrant Government Sectors as Race to Build Supply Industries Struggle
The obverse side of consumption is production. Consumption can only occur when there is production.
And that is what industry origin GDP is all about.
Growth has been uneven for its main segments.
Figure 3
The service sector crept higher 6.9% in the 3Q from 6.8% in 2Q. The industrial sector dropped to 6.2% from 6.5%. The agricultural sector contracted -.4% from .3%.
In the industry sector, construction real GDP accelerated 16.1% in 3Q from 14.1% in 2Q while utilities (electricity, gas andwater) also recorded strong growth of 5.0% as against 3.7% in the 2Q. Both these sectors are driven by or influenced by the government.
Construction activities may have been dominated by “build, build and build”
Public construction GDP surged 25.4% in 3Q as against 21% in 2Q while private sector construction GDP jumped 14.8% from 13.6% over the same period. Since many build, build and build projects have Private Public Partnership (PPP) arrangements, it isn’t clear whether private construction GDP incorporates such activities or not.
One thing is clear. There will be no slowing down of Build, build and build. Neither the weak peso nor rocketing debt levels will stymie its advance.
From the Inquirer (November 8, 2018): “We haven’t made a decision to slow down on the ‘Build, Build, Build.’ Even with the suspension of the [fuel] excise tax in 2019, we consider the ‘Build, Build, Build’ as a priority program. And so, as we said earlier, we are going to follow this hierarchy of essentiality. The least essential will be first cut, and the infrastructure program will be among the high-priority programs,” Socioeconomic Planning Secretary and National Economic and Development Authority (Neda) chief Ernesto M. Pernia told reporters Thursday.
This economic official blindly believes in free lunches! They are pushing the nation to the brink of a fiscal crisis!
Figure 4
The government or government influenced sectors also boosted the service sector, in particular, public administration and defense (17.8% in 3Q and 15% in 2Q), financial intermediation (7.6% and 7.6%), education (13.4% and 11.5%) and sewerage (5.4% and 5.6%). Including construction, these sectors comprise 23.34% share of the 3Q real GDP.
Where the government spent, it picked the winners. Where the government intervened by proscribing economic activities, it picked losers.
So the war on Boracay has resulted to Hotel and Restaurant GDP of 3.4% falling to its lowest level since 2015! This estimate measures the direct impact from such sweeping and draconian usurpation of property rights.
Of course, demand and supply chains attached to Boracay were also hit. Thus, the ripples from the war on Boracay may have spread to many sectors of the economy. The Boracay closure may have affected partly the ongoing liquidity strains in the banking system. Statisticians parading themselves as economists won’t get this.
On the other hand, only real estate (5.3% in 3Q, 4.3% in 2Q) registered an improvement among the sectors with the most significant share of the GDP. Trade (5.6%, 6.2%) and Manufacturing (4.0%, 5.5%) GDP were down. These sectors account for 37.42% share of the real GDP, the largest since 1998
Figure 5
The deterioration in consumer spending GDP trend has become a significant drag on Trade and real estate GDP. It is a matter of time before any short-term boost from the recent tax stimulus withers away and reveals itself with a resurgence in vacancies in the race to build supply industries financed heavily by debt.
In closing, the record fiscal deficit has impacted, not only in the increases of the general price level but also the distribution of economic activities favoring government and government-affiliated sectors. It also borrows money from the future to fund present activities in the hope that returns will be higher than the carrying cost of such deficit spending. And public borrowing draws away resources from the private sector
Through the crowding out phenomenon, 3Q GDP confirms further the ongoing transition to a neo-socialist state.
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