The core of the fallacy lies in the equating of the community as a unit, in some aggregated national accounting sense, with the individuals-in-the-community, in some political sense as participants, direct or indirect, in collective decision making—James Buchanan
In this issue
Why the Continuing Shortfall of the GDP, Despite Massive Stimulus in 2019? Risks Barely About POGOs, But About Concentration!
-An Incredible Record of Wrong Predictions
-Despite the Record “Shot in the Arm” Steroids, Why the Shortfall of the GDP?
-Forecasting Errors: In Defiance of Data, Trend and Theory, Mainstream Sells Hope!
-Why State Capitalism or Neo-Socialism Destroys Wealth
-The Clashing Trends of Consumer GDP and Trade GDP, Bank Loans Favored Consumers over Trade
-Has the Real Estate Industry Been Booming? Anecdotes and Prices Say Yes, GDP Says No!
-GDP and Financial Risks: It’s Hardly from the POGOs, It is Risks of Concentration!
Why the Continuing Shortfall of the GDP, Despite Massive Stimulus in 2019? Risks Barely About POGOs, But About Concentration!
An Incredible Record of Wrong Predictions
At the outset of 2019, these were some of the predictions made by mainstream institutions. (bold mine)
Panay News (December 26, 2018): The Philippine Chamber of Commerce and Industry (PCCI) said on Saturday that they expected the country’s economy to grow at an accelerated pace in 2019 on the back of robust consumer and government spending. “We agree with the projections of the Asian Development Bank (ADB) and the World Bank (WB) that see a growth rate of 6.7 percent in 2019 despite rising global uncertainty,” the PCCI said in a statement. “Indeed, we continue to be recognized as one of the more resilient economies in Asia.”
Inquirer (January 16, 2019): The Philippines will likely return to a high-growth, low-inflation regime this year, allowing the local stock barometer to recover to as high as 8,800 after a challenging period last year, local investment house First Metro Investment Corp. said. In a separate research note, however, Dutch financial giant ING said Philippine growth might hit a speedbump in the next two quarters with still-high levels of inflation and higher borrowing expected to somewhat sap both consumption and investment momentum. In a joint briefing with the University of Asia and the Pacific (UA&P) on Tuesday, FMIC said the Philippine domestic economy could expand by at least 6.8 percent to as high as 7.2 percent this year as slower inflation boosts consumer spending.
Inquirer (January 17, 2019): For 2019, the Amro’s growth forecast for the Philippines was 6.3 percent, below the earlier projection of 6.4 percent in its October 2018 report as well as the government’s 7-8 percent target.
Inquirer (February 19, 2019): The regional macroeconomic surveillance organization Asean+3 Macroeconomic Research Office (Amro) has slightly raised its 2019 growth forecast for the Philippines as inflation eases and the government builds more infrastructure this year. In a statement Monday, Amro said its latest projection showed the Philippines’ gross domestic product (GDP) expanding by 6.4 percent in 2019, up from the downgraded 6.3-percent growth forecast in January.
Businessworld (January 22, 2019) S&P expects Philippine gross domestic product (GDP) to grow by 6.4% this year, which is slower than the 6.6% forecast it gave in November. Still, this is faster than the 6.2% forecast for 2018 but well below the low end of the state’s target.
Inquirer (January 23, 2019): The Philippines nonetheless enjoyed accelerated public investment growth in 2018, “driven mainly by the implementation of large transport development projects,” and the UN expects this to be sustained this year. In 2019 and 2020, the UN projected the Philippines’ GDP growth at 6.5 percent and 6.4 percent, respectively.
Inquirer “Gov’t: 7% GDP this year should be easy” (January 24, 2019): Despite expectations of slower global growth, the head of the Duterte administration’s economic team yesterday expressed optimism the Philippines would achieve at least the lower end of its 7-8 percent growth goal in 2019 as the government ramps up infrastructure. “We are maintaining a 7-percent GDP (gross domestic product) growth rate as a fighting target even as major multilateral institutions have adjusted global growth projections. We are building on our own momentum and on the massive economic investments we have programmed for this year,” Finance Secretary Carlos Dominguez III told members of the Financial Executives Institute of the Philippines during its inaugural meeting for 2019.
Inquirer (January 26, 2019):The Philippines’ economic growth is expected to further slow and remain below government target in 2019 due to global economic uncertainties coupled with sluggish investment prospects in the domestic front. In a Jan. 24 report titled “Philippine Economy Unlikely To Gather Steam In 2019,” Fitch Solutions said expected the country’s gross domestic product (GDP) to grow by only 6.1 percent this year.
From ABS-CBN (January 29): The Philippine economy needs a "shot in the arm" on the fiscal and monetary fronts to achieve at least the low end of its 7 to 8 percent growth target this year, an analyst said Tuesday. Election-related spending is expected to stimulate consumption growth this year, as it did during the 2010, 2013 and 2016 polls, ING Bank senior economist Nicholas Mapa said in a statement.
Businessworld (February 13, 2019): “I don’t think you can have that kind of capital formation this year. One, the BSP hiked rates by 175 basis points (bp) — capital formation will take a hit. Second… you don’t have that public construction boom,” Mr. Mapa said, referring to the delayed enactment of the 2019 budget. “We’ll still get a decent number — maybe 3.3% — but it’s not gonna be enough to bring you back to close to 7% growth just because it’s an election year.” ING sees 2019 growth at 6.3%, which if realized will slightly pick up from last year’s pace but will miss the 7-8% target set by the Duterte administration.
Such excerpts constitute a splendid showcase of “When everyone thinks the same, no one is thinking.”
A puffed-up number of the statistical economy that fits into the political agenda can be easily presented by the National Government, which it has been done so. Even with this, the consensus has missed badly with their projections.
Or, in spite of this ability of fudge data, it has come with no surprise how mainstream economic wisdom can be so out of bounds!
That said, the real economy must be in a position worse than has been popularly perceived.
And yet, a "shot in the arm" on the fiscal and monetary fronts has been prescribed as an elixir to boost the economy.
Despite the Record “Shot in the Arm” Steroids, Why the Shortfall of the GDP?
Figure 1
Where we not provided with more than just shots, but an avalanche of policy ‘steroids’???
Let us count the ways.
From the fiscal side, the 11-month deficit of Php 409 billion has just been Php 149 billion short of the 2018’s record Php 588.3 billion, yet the second-largest deficit in history! Given 2019’s annual GDP data, December’s deficit must have narrowed this gap substantially. (Figure 1, topmost pane)
On the monetary side, haven’t the BSP dramatically slashed the ReserveRequirementRatio (RRR) by 400 bps that released about Php 400 billion of cash into the financial system, measures of which resonated with the RRR cuts taken against the Asian Crisis in the late 1990s? (Figure 1, middle window)
And had overnight lending rates been slashed by the BSP by 75 bps in 2019? While not a record, 2019's aggregate cuts should be seen in the light of combined policies.
And most importantly, through debt monetization, has the BSP not revitalized its inflationary tool by infusing Php 150.6 billion in November, or by Php 208 billion in 11-months, to lift the BSP’s net claims to the central government to an unprecedented Php 2.12 trillion? (Figure 1, lowest pane)
Again, in the face of such historic sale of inventions, why then the sustained downtrend of the statistical economy, the GDP, which climaxed in 2016?
Have such interventions been insufficient? Should the BSP and the NG double or triple down to achieve their objectives? To reach the optimal growth, exactly what extent of stimulus must be applied?
But ironically, why did the GDP perform better before all these?
Forecasting Errors: In Defiance of Data, Trend and Theory, Mainstream Sells Hope!
Figure 2
The itemized breakdown of the spending of the key sectors constitutes the expenditure side of the GDP.
In the 4Q, the near doubling of real public spending to 18.7% from 9.6% a quarter ago has functioned as the critical factor for the headline number of 6.4%! (Figure 2, upmost window)
After all the buzz about domestic demand, household consumption GDP even fell to 5.6% from 5.9% in the 3Q!
In the meantime, Capital Formation, Exports, and Imports GDP registered paltry gains of .4%, 2% and .3% from the 3Q’s -2.6%, .7% and -.2%, respectively.
And with the 4Q CPI falling to a 3.5 year low to 1.6% from 3Q’s 1.7%, the depressed PCE deflator used to arrive at the GDP must have been a crucial factor for ballooning these numbers. The Expenditure 4Q GDP’s implicit YoY index posted .38%, a smidgen above 3Q’s .37. (Figure 2, lowest left window)
And because 4Q actions constituted a continuation of the driving dynamic for the year, or more importantly since 2017, the annual data paints the same picture. (Figure 2, middle pane)
The crux: As the GDP construct shifted towards public spending, the contribution from the other segments have been weakening significantly.
The annual per capita GDP and per capita household consumption data exhibits such entropy.
Real per capita GDP of 4.3% in 2019 has stumbled to a 2015 low. Real per capita GDP has steadily been in decline, again, since 2016.
While real household spending per capita improved marginally to 4.1% in 2019 from 3.9% in 2018, it has been way down from the 2016 high of 5.4%. (Figure 2 lowest right pane)
That is, even from the mainstream’s standpoint of anchoring on statistics of national accounts, instead of a boom, the GDP has been emaciating!
Yet, institutional and establishment analysts have repeatedly been dismissing or overlooking the data, trends, and economic dynamics underpinning these, by forecasting high GDPs!
And because of such stubborn defiance, why wouldn’t their highly sanguine start of the year forecast miss badly by the year’s end?
And here’s the thing. What are the costs or penalties of failed predictions and advice? Nothing! Should anything go wrong, they would wash their hands by passing the blame on certain external factors that hugged the headlines. For them, to ensure access to savings, they would keep selling hope to the public…only cloaked with economic terminologies!
Perhaps they’ve all been smitten by John Maynard Keynes’ observation on investment crowds, “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”
Why State Capitalism or Neo-Socialism Destroys Wealth
Hardly any of these experts ever seem to explain that in the world of scarcity, known as economics, there are opportunity costs to every action. Such that when the government spends and consumes resources, these would have to come at the expense of someone else, through present taxes, future taxes (debt), and or currency debasement (inflation). And such actions merely destroy savings by diverting scarce resources to unproductive projects, as well as, creates powerful vested interest groups.
And accompanying the increased demand for resources would be the enlargement of the political bureaucracy, which will exercise expanded control through regulations, prohibitions, and mandates over the distribution of resources.
Besides, the intensifying leverage used to satisfy such political transfers would eventually become intractable to render the economy, and the NG vulnerable to risks from sharp changes in interest rates, credit, as well as currency.
And has it not been a puzzle to them that attendant to the increased centralization or expanded politicization of the economy leads to MORE, and not less, corruption?
From the Inquirer (January 23): The Philippines slipped 14 notches from its previous ranking in the latest Corruption Perceptions Index (CPI), a rating of global anti-corruption watchdog Transparency International has shown. In the group’s Corruption Perceptions Index 2019, the Philippines scored 34 to land in the 113th spot – a decline of 14 places from its previous rank at 99 in 2018.
When you see that trading is done, not by consent, but by compulsion - when you see that in order to produce, you need to obtain permission from men who produce nothing - when you see that money is flowing to those who deal, not in goods, but in favors - when you see that men get richer by graft and by pull than by work, and your laws don't protect you against them, but protect them against you - when you see corruption being rewarded and honesty becoming a self-sacrifice - you may know that your society is doomed.
Or as the great Austrian economist Ludwig von Mises admonished also in his masterpiece Human Action:
A society that chooses between capitalism and socialism does not choose between two social systems; it chooses between social cooperation and the disintegration of society. Socialism is not an alternative to capitalism; it is an alternative to any system under which men can live as human beings.
So why should anyone think that the progressive transformation towards centralization/big government/crony/state capitalism or neo-socialism will deliver prosperity?
Only because we’ve been told so?
The Clashing Trends of Consumer GDP and Trade GDP, Bank Loans Favored Consumers over Trade
Figure 3
I would even say that the GDP represents a hodgepodge of statistical flimflams.
For example, the consumer GDP and trade GDP data emits contradictory signals.
Consumer spending GDP is supposed to represent the demand side, while trade GDP is supposed to account for the supply side. Or, when consumers buy from stores, they are accounted for by the household GDP. (Figure 3, upper pane)
On the other hand, the trade industry GDP exhibits sector’s spending, representing investments/expansions, inventory replenishment, labor spending, etc., from the supply side.
The NG’s data shows that the consumer spending GDP has been slowing steadily from 2016 through 2019. Bizarrely, in the face of the diminishing consumer strength, the trade GDP has been booming!
Again consumer GDP grew 5.6% in the 4Q down from 5.9% a quarter ago, has been trending lower since hitting a pinnacle of 7.2% in 2Q of 2016. Meanwhile, trade GDP spiked to 8.6%, the second-highest rate since 2Q of 2016’s 8.9%. Trade GDP began to ascend sharply since its bottom in the 3Q of 2018.
If these data have some accuracy, then the economy is shown as undergoing a disproportionate buildup of supply relative to demand, which should compound the problem of excess capacity.
Second, again if this represents close to actual activities, the weakening trend of consumer spending should be bad news to the GDP.
In the context of business planning, stores should keep inventories at the minimum, expansion plans should also be conservative or shelved until household consumption shows adequate signs of strengthening.
Of course, consumer recovery would be unlikely, considering the aggressiveness of transfers undertaken from the average citizenry to the government mainly channeled through deficit spending, higher taxes, and the increasing bureaucratic economy. The cronies benefit from these too.
One notable example: The dilemma being faced by motorcycle taxis represented by the Angkas, resonates with the Transport Network Vehicle Services (TNVS) experience. The TNVS have been subjected to repeated onslaughts from authorities on the demand side (pricing caps), operations (licenses, driver requirements, and other operational regulations), and supply-side (limits).
Interestingly, the BSP’s data on banking loans to the consumers and trade has been diametric to the GDP trends.
Despite slowing consumer GDP, banking loans to the consumers have been booming! In contrast, bank lending to the trade industry has been flagging even when its GDP has supposedly been soaring. (figure 3, lower window)
Here’s a question, if the GDP data is accurate, then how has the trade industry been financing its expansion, if bank loans had become a less preferred option? By drawing down on its savings (retained earnings)?
Between the GDP and bank loans, which of these have been defective, and which have been accurate? Or could both have been amiss?
Has the Real Estate Industry Been Booming? Anecdotes and Prices Say Yes, GDP Says No!
The data on the real estate sector also exhibits signs of contradiction.
Demand from the mainland Chinese have been driving up prices of real estate has been a popular knowledge.
Back in the 1Q of 2019, the Philippines topped the IMF’s Global Housing Watch in price appreciation, while taking the eighth place in the real credit growth in support of this.
And since the demand from the mainlanders has powered sales and rent occupancy of many developers sending end-user (property and rent) prices rocketing, the supply-side should be expected to follow.
Figure 4
But the odd part has been that commercial prices, for the first time since 2017, has lagged condo prices through Q3 2019, according to data from the Bank for International Settlements. Also, the GDP data obscures such a perspective. (Figure 4, upmost window)
According to the GDP, after peaking in 2013, rent has been in a downtrend and stagnating, while real estate activities have hardly been booming. On the contrary, its GDP trend has been sliding since Q1 2014.
Real rent GDP was only 2.3% in Q4, while real property GDP was 5.3%, below the headline rate of 6.4%. Gross value added for the sector was a dismal 3.3%. (Figure 4, middle window)
In the meantime, bank loan data suggest that the growth rate of real estate loans have been improving since January 2019, while loans to the trade industry have sharply slowed (discussed above). (Figure 4, lowest pane)
The advancing growth rate of real estate loans must be signaling speculative positions on the end-user units than acquiring inventory, operations, and construction projects. Meanwhile, the mixed signals from trade muddle the actual conditions of the sector.
Additionally, since peaking in Q4 2018, construction permits, a leading indicator, has not only failed to produce a boom in the GDP in 2019 but has also been slowing dramatically through the 3Q. Have these permits vanished in a vacuum?
That said, rent and property prices, GDP, bank loans, and permits have been producing contradictory numbers suggesting a collision course in the economic picture from mainstream anecdotes, statistics, and economic theory.
A better viewpoint would likely come from the annual reports of listed firms from the sector.
GDP and Financial Risks: It’s Hardly from the POGOs, It is Risks of Concentration!
Finally, as I have been repeatedly saying: when in front of the public, the BSP will whitewash all forms of risks.
In response to a Fitch report stating higher risks from increased exposure of POGOs to the banks and the real estate sector, here’s a quote from the Philstar (January 20)…
The Bangko Sentral ng Pilipinas (BSP) has downplayed the risks posed by the offshore gaming industry to the real estate and banking sectors, saying measures are in place to manage the exposure of banks.
In a press briefing, BSP Governor Benjamin Diokno said the reliance of the real estate sector to Philippine offshore gaming operators (POGOs) does not yet pose a major risk to banks and property developers.
Instead, the following graphs should tell us, that with or without POGOs, concentration risk has been mounting on the GDP, which has matched by the banking system’s loan portfolio!
Figure 5
The % share of Real estate, construction, and retail GDP to the headline GDP, have soared to 35.8% as of the 4Q, which including financial GDP expands to 42.8%. The latter reached a record 45.92% nearly half of the real GDP in 3Q! (Figure 5, upper window)
The % share of Real estate, construction, and retail loans to the total, have soared to 36.4% as of November, which including financial loans expands to 46.7%, that’s almost half of all loans! (Figure 5, lower window)
These numbers tell us that once these credit-dependent sectors suffer a considerable slowdown, due to the feedback loop of their connectivity with each other, and with the general economy, severe dislocations will ripple across the real economy, and not just the GDP.
POGOs? They are just an aggravating factor.
Remember, since the online gaming industry is illegal in China, which most POGOs here cater to, one shouldn’t expect demand from this sector to be lasting.
When will the public and officials learn to distinguish between artificial and organic or natural?
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