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Expect the unexpected in 2019
Sunday, January 27, 2019
The Zeitgeist of 2018 GDP: The Record Deficit Spending, Was the Export Data Been Inflated?, History has Rhymed
The binary intervention of the government's budget, on the other hand, impairs this property right of every one in his own product and creates the separate process and the “problem” of distribution. No longer do income and wealth flow purely from service rendered on the market; they now flow to special privilege created by the State and away from those specially burdened by the State—Murray N. Rothbard
In this issue
The Zeitgeist of 2018 GDP: The Record Deficit Spending, Was the Export Data Been Inflated?, History has Rhymed
-History Has Rhymed: 2018 GDP Drops to 2014-2015 Level
-Consumers Allegedly Rescued 4Q GDP as All Categories of Expenditure GDP Dropped!
-Has Padding of the Export Data Been Used to Inflate the GDP?
-Did Consumers Really Open Their Wallets in the 4Q?
-The Zeitgeist of 2018 GDP: The Transition towards a Command Economy via Record Public Spending-Deficit!
-2018 GDP: More Evidence of the Deepening Command Economy, Has the Law of Diminishing Returns Been Rendered Obsolete?
The Zeitgeist of 2018 GDP: The Record Deficit Spending, Was the Export Data Been Inflated?, History has Rhymed
Two very crucial insights from the latest GDP data:
One, the landmark fiscal deficits have led to the deepening entrenchment of the transition process towards a command or centrally planned economy.
Two, the National Government has been possibly inflating the GDP considerably.
History Has Rhymed: 2018 GDP Drops to 2014-2015 Level
The Philippine Statistics Authority (PSA) announced the 4Q GDP at 6.1% last week, which was a tad higher than the revised 3Q GDP of 6.0%. The 3Q GDP had been revised down from 6.1% a before the 4Q/2018 publication.
Though higher than the previous quarter, the headline 4Q GDP print officially sealed the 2018 GDP to 6.2%, which was materially lower than 6.7% in 2017 and 6.9% in 2016. And though higher than the 10-year average of 5.8%, 2018’s real GDP has dropped to 2014 and 2015 levels of 6.1%.
Well, history has rhymed.
To recall, in 2014 the BSP raised rates to combat a crescendoing CPI as ramification to 10 successive months of ferocious 30%+++ money supply expansion. In 2015, the 2012 base CPI plummeted to a deflationary territory in September (-.37%) and October (-.19%), that prompted the BSP to launch a massive rescue package, the nuclear option of debt monetization!
And to rekindle the CPI, in support of the domestic version of the Quantitative Easing, in 2016, the BSP dropped policy rates to an unprecedented low with the institution of the corridor system as a camouflage.
Back then, build, build and build has yet to come to existence.
History has rhymed, yes, but the past is the father of the future.
The 2018 GDP print has emerged in the backdrop of interest rates still at historic lows (despite the 175 bps increase from May to November), an unparalleled money printing spree by the BSP and an unrivaled fiscal deficit from unmatched public spending in Philippine history.
With fiscal and monetary stimulus, or traditionally policy stabilizers or emergency measures in full force, the paradox is, the corrosion of the GDP persists.
In the meantime, systemic leverage rose substantially from 2015 levels. Total debt of the banking and the National Government (NG) grew by 13.05% in 2017 to place debt-to-NGDP at 89.19%. Back in 2015, the banking system’s credit portfolio expanded by 13.84% while total debt-to-NGDP was at 86.3%. With build, build and build in motion, the public sector has joined the borrowing fray.
And with total debt running at 14.38% as of November 2018, banking and NG debt-to-GDP can be expected to reach 90%.
As an aside, after the GDP, the NG is due to make critical economic and financial announcements next week: The Bureau of Treasury on the closing of the NG’s fiscal balances for the year 2018 and the BSP on the banking system’s credit and liquidity conditions also for 2018
And as the CPI raged beyond the threshold highs of 2014, the BSP panicked and raised by 175 bps their policy rates in 5 straight meetings within 7-months.
And not only have interest rates surged in 2018, but the sovereign yield curve has also significantly flattened at relatively higher rates than the past, to indicate tightening of financial conditions, which should be a recent milestone.
And with it, the banking system went into a massive fund-raising binge as deposit growth and cash reserves tumbled and as the Hold-Until-Maturity (HTM) asset became the accounting sanctuary for the industry’s mounting losses.
At the same time, while the stock market rampaged in 2017 financed by excess liquidity from the aggressive build, build and build boondoggles, the BSP led Financial Stability Coordinating Council admitted to their international central banking peers at the Bank for International Settlements that the Philippines encountered a “dislocation of crisis proportions” from the emergence of the “3Rs (repricing, refinancing and repayment risks)”.
And not long after such published financial concerns, regulatory relief or implicit bailouts had been activated by the Insurance Commission on pre-need firms and by the BSP on the banking system’s capital reserves through the Countercyclical Capital Buffer (CCyB) rule.
That stated, not only has the BSP’s reaction to 2015 has begun to take its toll as evidenced by the weakening GDP, but the profligate public spending projects have also been exacerbating the financial system’s entropy.
Consumers Allegedly Rescued 4Q GDP as All Categories of Expenditure GDP Dropped!
But the headline numbers have masked the real score in the 4Q GDP, thereby 2018’s GDP.
Figure 1
The GDP consists of two aspects: the expenditure GDP (demand) and the Industry GDP (supply). (see figure 1)
4Q Expenditure GDP revealed a stunning broad-based deterioration. Excluding consumer spending, government spending, capital investments, exports and imports fell!
Consumer spending or Household Final Consumption Expenditure (HFCE) increased by 20 bps to 5.4% in the 4Q from 5.2%, a quarter ago. and from 5.9% in 2Q.
Government Final Consumption Expenditure (GFCE) GDP decelerated to 11.9% in 4Q from 14.3% and was at the same level in the 2Q.
Capital Formation GDP shockingly plummeted to 5.5% from 18.2% in the 3Q and 21.5% in the 2Q. Without the boom in the Construction GDP (19.3%, 16.4% and 13.6%), Fixed Capital GDP (9.8%, 17.74%, 21.2%) may have turned sharply lower.
That’s because three of the four major categories of durable equipment slumped thereby sending its GDP fumbling 3.1% (4Q) from 18% (3Q), and from 28.2% (2Q). Specialized machinery registered 4Q GDP of 13%, 3Q 14.7% and 2Q 34.1%. General industrial machinery and equipment had 4.4%, 7.7%, and 17.3% and Transport -.4%, 25.3%, and 33.9%. Only the Miscellaneous Equipment eked out a growth increase 2.6%, -.3%, and 18%. The first three has a % share weight of 18%, 14.11% and 48% of the durable equipment GDP while Miscellaneous Equipment has a 20.3% share.
If capital investments are the harbingers to future economic activities what does this imply?
Has Padding of the Export Data Been Used to Inflate the GDP?
And here’s the thing.
The PSA’s export trade data and its export GDP contain an astonishing discrepancy!
Figure 2
Export GDP clocked in a hefty 13.2% in the 4Q, 13.3% in the 3Q and 12.6% in the 2Q. Import GDP dropped to 11.8% from 17.9% and 18.5% over the same period.
However, based on the PSA’s merchandise USD denominated trade data, export growth contracted by .25% in November and was hardly robust with a 5.5% growth in October. (figure 2, upper window)
And yet the magnificent variance in growth numbers between the GDP and trade data! Such remarkable deviance emerged in Q2 and Q3! And I’d suspect that 4Q won’t be any different.
The PSA has yet to publish its December numbers.
To do away with the currency effect, using the monthly average USD to convert PSA’s trade data to peso, current export growth in peso exhibits minor difference with those in USD. Export growth in peso was up 3.21% in November and 10.99% in October.
For nominal peso exports to reach the GDP equivalent, December exports would require a growth rate spike of about 20%! Otherwise, the distance between the export GDP and trade numbers would signify an ocean!
International demand principally determines exports. The PSA’s October and November trade data dovetails with the world trade conditions based on CPM Netherlands Data. These numbers have pointed to a downturn in global trade. (see figure 2 middle window)
In contrast, the 4Q export GDP numbers have departed from these.
Even more, exports are sourced mostly from domestic manufacturers. However, manufacturing GDP slowed to 3.2% in 4Q from 3.3% in 3Q and 5.5% in 2Q. Perhaps transshipments could be a source, yet import GDP slowed materially to 11.8% in the 4Q from 17.9% 3Q and 18.5% 2Q. And imports have mostly manifested domestic demand. Yes, imports tell us that the real economy has slowed significantly (regardless of what the GDP says)
To put it more bluntly, not only do these numbers contradict each other, these defy economic logic.
As I noted last week,
But, of course, since the GDP is a government constructed statistics, and since the government is driven by political incentives, GDP may exhibit what the NG desires to project for political or even economic reasons. For instance, boost GDP to lower credit risk to allow the NG to fund its record deficit cheaply.
Mania at Phisix 8,050! Beware of the January Effect, Will 4Q GDP Be Lower Than the 3Q? January 20, 2019
Tweaking the GDP from this perspective is easy.
To get the expenditure GDP:
GDP= HFCE+ GFCE+ Capital Formation + (Exports- Imports)+ Statistical Discrepancy
The difference between exports and imports are added to the other factors to compute for the GDP. Thus, the wider the spread of imports over exports (net imports), the more the reduction of the NGDP. Hence, from a statistical perspective, imports contribute negatively to the economy.
The latter shouldn’t be the case, though. Imports are the benefits. The cost to attain such benefits would be through exports. Or, we export to pay for our imports.
The real reduction to the (actual) GDP is the GFCE. Because the government produces hardly anything but survive on coercive transfers via its political mandate, whatever the Government spends represent consumption that comes at the expense of the productive sectors.
Back to exports.
By reducing the negative gap from a larger volume of imports, padding up the export data INCREASES the GDP!
Lo and behold, the national GDP numbers look better than it really is, because the PSA may have been inflating the EXPORT GDP!
Did Consumers Really Open Their Wallets in the 4Q?
With net imports contributing to a reduced 12% share of the RGDP, inflating the GDP would need more participation from other sectors than the export alone.
So what sector would that be? No other than the consumer spending!
Because consumer spending controls the most significant share of the real GDP (72%), an uptick pushed the GDP higher!
Again to uphold the PSA’s claim, the banking system’s data on consumer loans and liquidity must dramatically improve on December to more than offset the weakness manifested in the first two months of the 4Q.
Figure 3
Because consumers spent more, the PSA must have assumed that trade grew too.
So the PSA must have boosted the trade data which is a subsector of services under the industry GDP. Trade GDP registered 5.9% growth in 4Q, from 5.2% in 3Q and 6.2%. Again, with slowing growth in cash in circulation, bank credit growth for consumers and even the trade industry, how were consumers able to fund their improved purchases in the 4Q? (see figure 3)
Have consumers pulled savings from their cans and jars? Has the peso rained like manna from heaven? But even if the latter had been true M1 would have jumped!
So has the falling CPI provided buying power to the consumers?
It has been popularly held that the plunge in CPI has been from abundant rice harvests. Has this been true?
Well if the NG’s data is accurate, then the answer is NO. That’s because palay (real) output shrank -2.2% in the 4Q, -5.4% in the 3Q and -1.2% in the 2Q.
Perhaps rice imports did the job. With many bidding failures in the last quarter of 2018, perhaps not. Perhaps a slowdown in demand had been the elemental factor behind it. If so, the slowdown in CPI didn’t add to consumer spending, it was just assumed by the PSA.
The 4Q and annual reports from publicly listed retail firms which are due soon should shed some light on this.
We shall see.
The Zeitgeist of 2018 GDP: The Transition towards a Command Economy via Record Public Spending-Deficit!
The most critical insight provided by the GDP figures is the transition towards a command economy channeled through the record fiscal deficits.
If the expenditure GDP was mostly lower, it was more a nuanced view for the industry GDP.
Two of the three major categories of the Industry GDP registered gains. Agriculture GDP reversed course to post 1.7% growth in the 4Q from the previous decline of -.2% in the 3Q. The industry subsector GDP jumped 6.9% from 6.1% over the same period.
The principal contributor to the industry subsector’s GDP was the construction sector which clocked in another growth spurt with a blazing 21.3% pace in the 4Q from 18.2% in the 3Q while Utilities GDP (Electricity, Gas, and Water) also increased 6.6% from 4.7% in the same period.
Figure 4
Interestingly, for the first time since the 1Q of 2017, Private construction spending (20.2% 4Q, 14.1% 3Q) outgrew public construction spending (+16.3% 4Q, 25.5% 3Q) to suggest that the private sector has taken more active role in the Public-Private Partnerships (PPP) in the “build, build and build” projects. (figure 4, upper window)
Fascinatingly, the inflation in construction material prices seems to resonate with such changes. The construction material wholesale price index (CMWPI), which monitors “the price escalation of construction materials for various government projects” appears to be decelerating based on the 2000 prices. The CMWPI index peaked at 8.79% in June has slipped to 7.81% inDecember.
The BSP’s net claim on National Government appears to track the movement of price changes of the CMWPI. (figure 4, middle window) Has the BSP been the principal source of build, build and build?
On the other hand, construction material retail price index (CMRPI) which measures price escalation of construction materials in the private sector has reaccelerated to 2.35% in December. The price bump could be signs of increased participation of the private sector in the build, build and build projects via PPPs.
As one would note, while the CPI has declined, the main entry point of money via the “build, build, and build” projects which emanates either from the BSP’s printing press or from the banking system’s loans continue to manifest robust inflation in the said sector. Unless counterbalanced by reduced money supply due liquidity drains in the banking system, such money inflation would percolate or diffuse into the economy
And for as long the avalanche of money injections to the sector persists, the CPI will remain vulnerable to spikes.
As been said before, stagflation is our future.
And another thing, one way for the NG to do away with inflation is to rebase the price index. That said, the CMWPI will be rebased from 2000 to 2012. So from 7.8% (2000 index), the December CMWPI has been recalculated (2012 index) lower to 5.69%. Boom! Lower Inflation! (see Figure 4, lowest window)
2018 GDP: More Evidence of the Deepening Command Economy, Has the Law of Diminishing Returns Been Rendered Obsolete?
Again, the record fiscal deficit by the NG continues to critically shape or substantially influence the GDP.
Figure 5
Aside from construction, education GDP accelerated by a torrid 17.3% clip in the 4Q from 14.2% a quarter ago.
Though public administration GDP pulled back to 12.6% from 17.8% over the same timeframe, its growth rate remained at double digits in the four quarters of the year compared to the single-digit rates in the previous years.
The financial intermediation GDP grew by less at 6.0% from 6.9% as the industry continued with its workaround on the financing of the NG's unprecedented deficit spending. Meanwhile, sewage expenditures, as part of the infrastructure projects, grew by 5% from 4.1%.
On the other hand, real estate and manufacturing GDP decreased to 4.4% and 3.2% in the 4Q from 5.5% and 3.3% in the 3Q, respectively. These sectors representing the first (24.06% in 4Q) and the third (10.72%) largest, respectively, accounted for 34.78% share of the real GDP.
The acceleration in private construction GDP in the face of a tepid real estate GDP reinforces the perspective of the increased participation of the private sector in the NG's infrastructure projects.
Meanwhile, the second largest share (+17.7%) of the industry GDP is the Trade sector, which grew by 5.9% in the 4Q from 5.2% a quarter ago, reflected the expansion of consumer spending.
From the bank credit perspective, bank lending to the political sectors remained robust in November in support of the GDP: Public administration 32.05%, Education 24.45%, Financial Intermediation 29.4% and Construction 38.07%.
The slowdown in transport GDP likewise resonated with the deceleration of the sector's bank loan growth of 17.09%
All these demonstrate that the zeitgeist of the 4Q and annual GDP of 2018 has been the transition of the Philippine political economy towards a neo-socialist state channeled through the record deficit spending.
And as one would note, the NG’s ambitious and aggressive "build, build and build" projects, as well as, other political expenditures expressed via record deficits continue to siphon off resources, labor, and financing from productive investments. In doing so, such forces an increase in the public’s time preference (short term orientation), leading to changes in the economy’s production structure that consequently results to an increase the consumption/saving ratio. Such imbalance would reduce savings and capital accumulation, or at worse, lead to capital consumption, thereby resulting in a lower standard of living.
And while domestic establishment experts have been ebulliently falling over themselves over the prospects of a stronger economy in 2019, analysts from foreign institutions have pushed back, forecasting that the current GDP levels will persist citing various reasons (tightening liquidity, slower exports, and decrease infrastructure spending, sub-optimal infrastructure spendingand public procurement, higher debt levels, leveling investment growth and weak business sentiment)
In contrast to them, expect the unexpected in 2019.
As a final note, the gist of the GDP data is its per capita data. Per capita GDP means GDP per head/individual (GDP divided by the population) or economic growth per person.
On a quarterly basis, 4Q GDP per capita of 4.4% fell to a 2Q 2015 (4.3%) low. (figure 5, lowest window).
On the other hand, per capita household spending at 3.8% in 4Q was modestly up from 3.5% in the 3Q but has operated on a Q4 2014 low of 3.6%
Both per capita GDP and HFCE have trended south for a period of time.
With monetary and fiscal stimulus running in full throttle, what tool/s has remained available for the NG to use to boost the GDP, especially if the downturn in the real economy becomes conspicuous or self-evident?
Has fundamental law of diminishing returns been forgotten? Of has it been rendered obsolete?
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