Saving and the resulting accumulation of capital goods are at the beginning of every attempt to improve the material conditions of man; they are the foundation of human civilization. Without saving and capital accumulation there could not be any striving toward non-material ends—Ludwig von Mises
In this issue
The Historic 2020 Recession Eradicated Nearly 3-Years of PER Capita GDP and Household Gains! Recession to Extend in 1Q 2021, says the NEDA!
I. Surprise, The National Government Sees The Recession Extending to the 1Q 2021!
II. The Historic Recession Eradicated Nearly 3-Years of PER Capita GDP Gains!
III. Say’s Law: How Supply Disruptions Undermined Consumer Demand
IV. Where will Investments Emanate from? Capital Formation’s Downtrend and its Collapse in 2020
V. The Eroding Magic of Fiscal Stimulus
VI. Four Interdependent Factors to Drive the Economy
The Historic 2020 Recession Eradicated Nearly 3-Years of PER Capita GDP and Household Gains! Recession to Extend in 1Q 2021, says the NEDA!
I. Surprise, The National Government Sees The Recession Extending to the 1Q 2021!
That was fast!
A week ago, defying the consensus expectations of a strong economic rebound, Nissan Motor Philippines and the Makati Shangri-La announced plans to shut operations.
And instead of favorable developments supporting the optimistic bias, the National Government (NG) suddenly showed likely signs of downshifting its growth targets.
From the Inquirer (January 30): While rosy prospects for recovery abound in the near term, the first quarter of 2021 would likely remain under extended recession due to the slow reopening of the economy, the country’s chief economist conceded on Friday. In a briefing with the Foreign Correspondents Association of the Philippines (Focap), Acting Socioeconomic Planning Secretary Karl Kendrick Chua said nothing significant has changed so far during the first quarter in terms of easing quarantine restrictions, especially given the threat from more contagious COVID-19 variant.
Once a disregarded tool, the National Government now sees mobility as a measure of economic conditions. But because of the still rigid restrictions, they are now projecting an extension of the recession in the 1Q.
Is it still so hard to conceptualize that economic freedom is critical to development?
Nonetheless, as they still see things, the vaccine, gradual reopening, and confidence are purportedly the rudiments required for the economy to recover.
Curiously, if the 1Q will remain negative, then the GDP during the last three quarters must soar substantially above its revised annual target for 2021 of 6.5% to 7.5% to attain it. But what if the 1Q still shows a big negative number, considering that January mobility trends remain at the November-December levels?
Figure 1
The NG announced that the 2020 annual GDP slumped to a 9.5% contraction, the worst one-year recession since 1947, dragged down by the 8.3% contraction in the 4Q.
II. The Historic Recession Eradicated Nearly 3-Years of PER Capita GDP Gains!
But the economy is not only about numbers. It is about human actions of voluntary exchanges, from production and or services.
The large-scale shutdown of the economy in response to the pandemic, forcing many businesses to close, was the fundamental cause of the recession of 2020.
And this is just the first segment of the story.
As earlier pointed out,
Instead, the recession of 2020 is about the lockdown socialism, which intensified pre-existing maladjustments and imbalances:
-resulting in the staggering destruction of capital
Strong Economic Recovery? Mobility Trends in 1H January Still Sharply Down, PSE’s Incredible Small Cap Bubbles! January 17, 2021
Assuming the PSA numbers represent an estimation of actual conditions, the economic damage from this year’s recession has been brutal.
As a side note, my take is that there is more than meets the eye or the PSA estimates understates actual conditions.
The 2020 historic recession, which translated to a Php 1.843 trillion loss, essentially wiped out 84% of the sum of the two-year (2018 and 2019) marginal real GDP of Php 2.193 trillion. Two years.
It’s even worse from the per capita real GDP basis: this year’s Php 19,402.04 loss expunged 81.3% of the accrued three-year marginal GDP gains Php 23,865.1. Three years. Incredible.
Separately, since peaking in 2017, the year-on-year nominal peso margins of the annual GDP and the per capita GDP appears to have plateaued before the recession struck.
Again, this is taking the PSA’s numbers at face value.
Sure, growth from a lower base effect, similar to Milton Friedman’s plucking model, which sees the economy bouncing back to its potential path, serves as the basis for most of the econometric constructed predictions made by the consensus. And this will only happen if the National Government undertakes the necessary measures to boost aggregate demand through fiscal spending, mostly through infrastructure and other public works and welfare programs. So it is held.
But again, largely ignored in the context of analysis are the induced structural effects of the lockdown socialism, in particular, the disruption to the supply networks that attenuated demand, reducing and causing losses in income, jobs, and wages.
III. Say’s Law: How Supply Disruptions Undermined Consumer Demand
In perspective, the massive recession also eviscerated 74% of the aggregate real household spending GDP covering the two-year gains of 2018 and 2019.
The recession also eradicated 77.5% of the aggregate gains of three years of real household spending per capita GDP covering 2017 to 2019. Three Years!
Not only has the staggering degree of losses translate to reduced spending power, but it also implies diminished savings, and subsequently, the reduced capacity to invest.
What’s more, reflecting the headline GDP, the marginal annual gains of household consumption GDP and the per capita counterpart appears to have been leveling off from their 2016 pinnacle. The thing is, nominal growth of household consumption has been slowing since 2016 before the collapse of 2020.
The mainstream idea is that consumer spending drives the economy. That's because governments are predisposed to see the economy being demand-driven, as evidenced by the GDP construction, where consumer spending accounts for the largest share.
But consumers don’t spend on a vacuum; they spend on either product or services. And services are backed up by some products.
For instance, what constitutes a barbershop? A typical barber’s business constitutes labor (barber), property (rented or acquired), infrastructure (light, aircon or fans, barber’s chair, mirror, and others), and supply (cutting and shaving tools, shampoo, powder, alcohol, towels, and more). A commercial haircut translates to the services of a barber using the facilities and consumables of the barbershop.
Furthermore, consumers acquire their spending power (income, profits, or wages) by producing goods or supplying goods and or services. Or, they get employed by enterprises doing so.
In a barter economy, a commodity or service is exchanged with another commodity or service. In modern society, money is just a medium to facilitate such exchanges.
As the British political economist David Ricardo explained Say’s Law,
M. Say has, however, most satisfactorily shewn, that there is no amount of capital which may not be employed in a country, because demand is only limited by production. No man produces, but with a view to consume or sell, and he never sells, but with an intention to purchase some other commodity, which may be immediately useful to him, or which may contribute to future production. By producing, then, he necessarily becomes either the consumer of his own goods, or the purchaser and consumer of the goods of some other person…Productions are always bought by productions, or by services; money is only the medium by which the exchange is effected.
David Ricardo, Chapter XXI Effects of Accumulation on Profits and Interest, THE WORKS AND CORRESPONDENCE OF DAVID RICARDO p 290-291
Consumers can only spend, therefore, on goods and services that are available. Or consumers, in essence, are producers (or service providers) too.
Can people take a vacation on another planet or in an underwater city, or mine an asteroid for minerals? My guess is that billionaires would probably like these, but the current state of technology has still been inadequate to support such industries. Demand is, therefore, limited by production.
That said, supply disruptions and trade dislocations from the lockdown socialism, restricted the output of goods and services, incited the collapse in consumer spending, and subsequently, the GDP in 2020.
From Philstar (January 31): Total consumer complaints against online and offline businesses grew by over 400 percent last year, according to the Department of Trade and Industry (DTI). Data presented by Trade Undersecretary Ruth Castelo in an online press conference showed the DTI received a total of 57,839 consumer complaints last year, more than five times the 10,918 lodged in 2019.
After all the social, commercial, and financial disruptions from the lockdown socialism, the blame is placed on the lap of the private sector to justify even more interventions? So where does this lead us, nationalizations, quasi-monopolies and or cartels?
IV. Where will Investments Emanate from? Capital Formation’s Downtrend and its Collapse in 2020
Investments, from savings, are required for the economy to grow.
But the investment environment, alongside bank’s liquidity and deposits, has been deteriorating even before the pandemic.
Figure 2
After reaching its growth zenith in 2016 of 38%, capital formation in durable goods has been cascading. In fact, real Durable Goods GDP shrunk by 7% in 2019 before plummeting 31.3% in 2020.
In the meantime, while the real construction GDP crashed 29.7% in 2020, the striking part of the PSA’s national income data has been its downtrend since 2012. Seeing such numbers should prompt an inquiry: where’s the supposed boom in infrastructure and real estate? Which is the noise: media or the construction GDP data?
Real construction and durable goods GDP commanded a 12.8% and 5.6% share or a combined 18.4% of the expenditure GDP, which was substantially less than 23.9% share in 2019, to exhibit the degree of collapse.
Because real construction and durable goods GDP represented the largest share of investments, the real gross capital formation GDP nosedived 35.9% in 2020, after barely growing in 2019 at 2.5%. The collapse in real gross capital formation pulled down substantially its weight contribution to the national GDP to 18.6% from 26.2% in 2019!
Resonant with its subcategories, the gross capital formation GDP peaked in 2016 then headed south.
The capital formation or investment trends have been in decline PRIOR to 2020! The pandemic functioned as THE accelerating factor.
The big question is why the downturn in investment trends? Importantly, how would vaccine, reopening and confidence turnaround such dynamics?
V. The Eroding Magic of Fiscal Stimulus
Fiscal stimulus and its multiplier function are popularly believed to play a crucial role in economic development. But the NG’s GDP data shows otherwise.
Real public spending accounted for a 15.2% share of the GDP in 2020, a significant jump from 12.4% in 2019. Public spending was the only area of growth in the expenditure side GDP in 2020, posting a 10.4% expansion during the historic recession.
Over a longer time frame, the ascendant share of the fiscal spending comes at the expense of the consumers as demonstrated by the latter’s declining trend.
But because capital formation and merchandise trade endured much more severe pounding, the consumer’s share of the GDP rebounded despite its battering in 2020.
The thing is, the thrust to centralize the economy has been crowding out private sector spending that has spilled over to the consumers.
Figure 3
VI. Four Interdependent Factors to Drive the Economy
In our first outlook for 2021, I wrote,
Today’s recession is a product of a politically mandated economic shutdown purportedly in response to the pandemic. The lockdown induced recession represented a supply and demand shock, which forced income, wage, and job losses, as well as massive disruptions on production, distribution, and exchanges. More importantly, the shutdown caused capital decumulation and exacerbated accrued imbalances from the pre-pandemic era.
And what is the supposed blueprint for the 2021 growth?
The implementation of a mishmash of top-down measures consisting of infrastructure spending, the vaccine rollout, the accelerated reopening of the economy, the CREATE bill, credit easing, and other proposed public spending and relief programs of the National Government and the BSP should serve as the antidote to the record recession of 2020.
The point is, while top-down policies caused the record recession, the establishment sees the economic comeback predicated on the same failed centralized planning activities.
A Big Economic Comeback in 2021? Or Will Stagflation Risks Upset Consensus Expectations? January 10, 2021
The consensus sees the trajectory of the Philippine GDP as continuing the same path regardless of the response of the main street to their policies.
That is, for the National Government, more centralization or top-down approach is the solution to this recession.
Though I made my predictions in early January, here’s another version:
The economic performance of 2021 depends on four interconnected and interdependent factors.
The first is the direct impact of the lockdown socialism as manifested by the likely extension of the 2020 recession in the 1Q 2021.
The next represents the indirect consequences, which will be manifested by the lingering effects of mandated supply disruptions, price controls, consumption of savings or decumulation of capital, and regime uncertainty from heavy political interventions on commercial activities.
Additionally, the rigorous restrictions on commercial operations should cloud or muddy the entrepreneurs’ ability to forecast the future to make the necessary calculations and business adjustments. Such an environment fosters risk aversion and confidence issues.
The third factor is the ramifications of the bailout policies implemented by authorities to cushion the economy. If the economy fails to generate enough taxes to pay off its rapidly accumulating liabilities, will it raise consumption taxes soon? How will this affect growth dynamics? And to what extent will QE contribute to economic maladjustments?
Figure 4
The impact of pre-existing imbalances, representing the fourth and last force, or the business cycle should add to the mix. Falling investments, declining car sales and production, surging Non-Performing bank loans, overinvestments in real estate and shopping malls, concentration risks, among many others, are examples of this.
For instance, the share of four industries (financials, construction, trade, and real estate) continued to rise and have accounted for a record 41% share of the 2020 real GDP. The share of the top four rose because of the strength of financials despite the plunge in the share of the real estate sector.(Bank loans also exhibit the same dynamics, but the BSP has yet to publish the annual data. Data above covers November.)
Because the economy is complex and dynamic in structure, cross-feedback loops should emerge, magnifying uncertainties.
Adding these together, battered by an unprecedented recession, the Philippine economy is even more vulnerable to shocks.
This perspective covers the GDP only, as the updates of the financial and the banking system have yet to be published.
