Economists are no longer social theorists but theoretical social engineers. They have little interest in understanding the economy per se but instead evaluate policies intended to shape the world. And they are largely ignorant of the field’s history, which means there is little understanding of the ideas of economics—Per Bylund
The 3Q GDP 7.1% Ramp: A Consumer Boom in the Metaverse Economy; Mistaking L-Shaped Recoveries with a Low-Base Effect Boom, Public Spending as Key Driver
In this issue
I. The GDP as a Political Statistic
II. Statistical Milestone from the Combined 2Q and 3Q GDP! NEDA’s Sentiment Jumps from Fear to Mania!
III. Was Household Spending The Root for the 3Q GDP Spike? Rising Unemployment, Lack of Investments, BSP Subsidies to Banks
IV. Was Household Spending Responsible? Debt-Based FDI, Cognitive Dissonance on Demand
V. Jollibee’s L-Shaped Recovery Debunks the Consumer Demand Boom
VI. The Mirage of the Low-Base Statistical Boom, L-Shaped Recoveries, and Retail GDP Soar to Pre-Pandemic Levels!
VII. Public Spending: the Unheralded Driver of the 3Q GDP!
The 3Q GDP 7.1% Ramp: A Consumer Boom in the Metaverse Economy; Mistaking L-Shaped Recoveries with a Low-Base Effect Boom, Public Spending as Key Driver
I. The GDP as a Political Statistic
Do you know that the politics of war financing was behind the invention of the GDP? Writes economist Diane Coyle, (bold added)
Warfare is the mother of invention. Many new technologies that end up in use in civilian life have been spurred by the demands of conflict — and funded by the military. Among these inventions, ranging from the Internet to Teflon, radar to programmable electronic computers, is Gross Domestic Product. GDP is one of the many inventions of World War II. But the use of national accounts for the purposes of warfare started much earlier. In 1665, a British scientist and official, William Petty, produced estimates of the income and expenditure, population, land and other assets of England and Wales. His aim was to measure the whole of the economy in order to assess the country’s resources with regard to its ability to fight a conflict and finance it through taxes. That particular war was the now little-known Second Anglo-Dutch War, which lasted from 1665 to 1667.
Diane Coyle, Warfare and the Invention of GDP, the Globalist, April 6, 2014
If politics served as the incentive for it then, why should it not be today?
Defined by the Philippine Statistics Authority are the roles of the CPI and the GDP. (all bold mine)
The CPI is "used for economic analysis and as a monitoring indicator of government economic policy."
The GDP: “The Philippine System of National Accounts (PSNA) generates macroeconomic indicator on Gross Domestic Product (GDP). The GDP represents the monetary value of all final goods and services produced within the economy in a given period of time. The PSNA describes a comprehensive view of the country’s economic performance and allows to monitor the behaviour and structure of the economy. The PSNA covers the economic transactions that are recorded in summary tables and balance sheets called accounts. These accounts are summarized in integrated, coherent and consistent manner based on the internationally agreed standard concepts, definitions, classifications and accounting rules.”
Please note here that because the GDP represents "the monetary value of all final goods and services produced within the economy in a given period of time", the BSP’s policies determine the amount of liquidity in the system that establishes the monetary value of the GDP. We shall get back to these below (Public Spending: the Unheralded Driver of the 3Q GDP).
Further, the System of National accounts, represented by the GDP, is "used to forecast the future growth of the economy or study impacts on the economy and the institutional sectors of identified government policies and programs."
Instead of an estimate geared towards an accurate representation, these statistics are sensitive to politics. Or, such statistics are prone to the advancement of the interests of the ruling class.
Furthermore, publication of such statistics comes without competition, thus signifying a monopoly, and also are not subject to audit. Hence, relying on the accuracy of these statistics represents a matter of faith.
As noted last week, the CPI…is inherently imbued with a political component.
With the election season in May 2022, wouldn’t a temporal boom in the financial markets help the odds of the incumbent’s anointed candidate?
II. Statistical Milestone from the Combined 2Q and 3Q GDP! NEDA’s Sentiment Jumps from Fear to Mania!
The Headline GDP soared 7.1% in the 3Q!
Figure 1
First, let us join the crowd in beatifying it with an expanded view.
The first chart should be music to the ears of the establishment.
The second and third quarter (real) GDP increases of 12% and 7.1% marked the fastest two-quarter growth ever. It surpassed the 12% and 6.4% of the post-Asian Crisis records of 4Q 1998 and 1Q 1989. (Figure 1, topmost pane)
Economic authorities issued a dire long-term assessment of the economy at the end of September.
From CNN, September 25: The Philippine economy may hit its pre-pandemic level by the end of 2022, but coronavirus restrictions will continue to hurt the country in the next four decades, with estimated losses amounting to a whopping ₱41.4 trillion, the state's top economic policy body has predicted.
But with the 3Q GDP, they have gone into full reverse mode!
From CNN, November 9: The Philippine economy could finally return to its pre-pandemic level by next year, given its higher-than-expected growth in the third quarter, the National Economic and Development Authority (NEDA) said. "To get to pre-pandemic nominal GDP level, it would certainly be in 2022, even as early as the first quarter," NEDA chief Karl Chua said in a virtual briefing on Tuesday.
Amazingly, they have even floated the idea that the Philippines may acquire an "upper-middle-income status in 2022"!
From fear to mania! Just because of two-quarters of outperformance!
Imagine, all it takes for people to prosper is for a government agency to declare so!
This demonstrates the reductio ad absurdum of the mainstream view of how the economy works: the economy is nothing else than a set of programmable control valves operated and measured in numbers.
III. Was Household Spending The Root for the 3Q GDP Spike? Rising Unemployment, Lack of Investments, BSP Subsidies to Banks
Authorities arrive at the GDP numbers, signifying an output from econometric models, from different surveys assembled from various public agencies.
Yet, the numbers didn’t emerge out of a vacuum. They had a story to tell.
For the 3Q, it seemed premised on "reopening redounds to the redemption of the incumbent's policies."
Yes, the reopening magic. Again, it is agreeable that reopening helps heal some of the wounds. But the issue is more complex than commonly presented.
And indeed, as noted last week, a lower CPI helped magnify the GDP.
An international media outfit interpreted the unexpected 3Q GDP spike as a result of household spending. Bloomberg, “Philippine Household Spending Accelerates Economic Recovery” (November 9, gated).
Because the reopening allowed more people out, it assumed that a spending boom ensued. This boom seemed to have served as the framework for the 3Q GDP.
How valid is this theory?
We shall deal here with the expenditure side of the GDP.
Indeed, it does appear that the household powered this quarter's impressive growth rate. Household (real) consumption likewise posted a 7.1% GDP, the second consecutive quarter of over 7% growth!
The last time household spending expanded by this exemplary rate for two consecutive quarters was in the election year of 2016.
Because this sector represents the largest, its 3Q 7.1% (real) growth magnified the sector's share of the GDP to 73.3% in Q3 2021! It was only 67.5% in the 2Q 2021!
The odd thing is that the same agency, which calculated the GDP, earlier declared that unemployment rose in August and September.
From the Businessworld, November 5: THE UNEMPLOYMENT RATE rose to 8.9% in September, as bad weather left nearly 900,000 without work in the farm sector and strict lockdowns claimed over 340,000 factory jobs, the Philippine Statistics Authority (PSA) reported on Thursday. Based on the preliminary report of the September round of the labor force survey (LFS), the jobless rate increased to 8.9%, compared with the 8.1% in August. This was the highest this year, matching the revised 8.9% jobless rate in February.
The unemployment rate was 8.1% in August and 6.9 in July. (Figure 1, middle window) That is, if we are to believe in the PSA’s data rather than the much higher unemployment rate of SWS.
So should the public accept the narrative that the more unemployment, the greater the spending growth?
Secondly, why the surge in unemployment in August and September?
While ironically, strict lockdowns serve as a popular and convenient pretext, how about the depletion of capital, which reduced investments, and the price instability from the loss of purchasing power of the peso?
Remember the IHS Markit observation of the manufacturing sector, which continues to be highlighted by stagflation: declining output, surging input, and rising output prices, and the shedding of the labor force?
Markit’s account showcases the imbalance besetting the sector, which should apply to the rest of the economy.
Of course, add to this dilemma the zero-bound regime policy of the BSP, which has effectively contributed to the diminishing rate of peso deposits. (Figure 1, lowest window)
Not only are savers punished by artificially suppressed rates to the benefit of the borrowers, but it also contributes to the malinvestments, as well as reduces the purchasing power of the peso.
Savers comprise mainly the average citizenry, while the largest formal borrowers are the government, banks, and the elites. Many listed firms on the PSE represent some of the economic or financial interests of these elites.
The BSP presumes that their policies induce a trickle-down effect!
Record fiscal deficits also transfer massive amounts of resources and finances from households and businesses to the government.
Also, the thrust towards political centralization through escalating interventions or expansive regulatory regime spawn regime uncertainty, which disincentivizes entrepreneurship, competition, and innovation.
Such an environment similarly favors the politically connected coming at the expense of the small and medium enterprises.
That said, such regime uncertainty from the combined political, economic, and monetary intrusions plus limited capital constrain investments inhibits employment growth that subsequently represses household or consumer spending.
Figure 2
Bank lending has improved by a margin in Q3. That is because banks operate on the BSP’s lifeline, as previously explained. (Figure 2, topmost pane)
A Bounce is Not a Recovery: 2Q GDP 11.8% Boom: Low-Base Effect and Government Spending Boom! August 15, 2021
Besides, such rescue policies are scourged by diminishing returns. So with reduced opportunities to generate cash flows, banks are now taking more risks.
Paradoxically, the GDP incorporates the historic subsidies to the banking system and calculates these as growth! Real bank GDP increased by 6.4% in the 3Q. Amazing. (We shall elaborate on this soon)
Unfortunately, bank lending to consumers remained in contraction. While nominal GDP soared 11.6%, bank lending to consumers remain in the deflationary zone (-7.78%) (Figure 2, middle pane)
IV. Was Household Spending Responsible? Debt-Based FDI, Cognitive Dissonance on Demand
The limits of investments from local investors leave FDIs as the only alternate source.
But then…
From the Inquirer, November 9: The Philippine Economic Zone Authority (Peza) saw its investment pledges drop by around 25 percent over the past three quarters compared to the same period in 2020, reflecting the impact of the pandemic in the agency’s efforts to attract job-generating projects.
Whatever happened to the reopening?
While the BSP reported growth of FDIs in July and August, these represented mostly debt, which typically accounts for borrowing by local subsidiaries from parent firms abroad. Debt accounted for 70.8% of the FDI flows YTD. Yet, these may not be about investments but survival. (Figure 2, lowest window) To accentuate, FDIs have been on a downtrend since 2016.
With stunted growth in consumer borrowing from the banking system, constrained investments, and also a downtrend in peso deposits growth rate, what signified the source of the supposed boost in spending?
The dubious OFW data? Substantial wage increases of the employed (amidst millions of unemployed)? Spending binges (revenge spending) of the bureaucracy as recipients from record public spending, as well as subsidy beneficiaries of the banking system and their clients?
Curiously, cognitive dissonance appear to have engulfed authorities.
BSP officials have been programming us to believe that the stubbornly high consumer CPI signifies a consequence of supply chain gridlocks and thus are transitory.
For example, from the Inquirer, November 9: There is scant evidence that rising prices currently hammering the Philippine economy is causing a chain reaction of inflation to warrant raising interest rates, the head of the Philippine central bank said. Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno said the key to reining in inflation remained to be “non monetary government measures to augment the domestic supply of key food items.” …The BSP chief—who has, in recent months, been resisting calls for more aggressive action against “supply side inflation: — said the recent price increases have been traced mainly to higher prices of a limited number of items owing to pressures that are “transitory” in nature. He said these supply shocks included the impact of adverse weather conditions on prices of some agricultural food items, the rise in imported crude oil prices, and the ongoing African swine fever outbreak in the country.
Get this. High CPI is transitory because demand hasn’t been strong enough to warrant a tightening of policies.
But when elaborating on the GDP, the spiel runs in the opposite direction. So what gives?
Or when defending their policies, demand is supposed to be weak, but when patting their backs on the GDP, the political and monetary bigwigs say demand is strong!
V. Jollibee’s L-Shaped Recovery Debunks the Consumer Demand Boom
One can crosscheck such GDP claims with relevant reported activities of listed firms with captured consumer markets.
Figure 3
For instance, while Jollibee reported a surge in income in the 3Q from a low-base effect, its peso (total and domestic) revenues reveal an L-shaped recovery from the 2020 nadir. (Figure 3 topmost pane)
Like Ayala Land, domestic sales have regressed to 2016 levels! [Ayala Land’s Fabulous 3Q Growth Exposed, Fintech Driven PLDT Boom? Treasury Yields Spike as October CPI Slows, November 7, 2021]
With the company’s thrust to expand overseas, the share of domestic sales continued its southbound path. It was 59.5% in the 9-months of 2021.
So, not even domestic sales from Jollibee support such an imagined GDP boom scenario from the households. The same applies to Robinsons Retail and Philippine Seven which I will show in the future.
VI. The Mirage of the Low-Base Statistical Boom, L-Shaped Recoveries, and Retail GDP Soar to Pre-Pandemic Levels!
This leads us to the next level of discussion, the base effect.
Here is the thing. While everyone glorifies the buoyant 3Q economic statistic, nobody seems to have mentioned that the current boom was principally a product of a low base effect.
More importantly, the same L-shaped recovery has burdened the GDP (current and nominal).
The PSA’s national accounts data tell us further that had the GDP been slightly lower, this would have violated the second or reconfigured trendline to the downside that would have sent shivers down the spine of statisticians! (Figure 3, middle window)
And a lower than 7% data would have even been worse for the per capita household GDP! (Figure 3, lowest window)
Or should peso-based GDP turn lower, it reveals that recessionary forces continue to linger behind the scenes!
See now the next set of incentives that impels statisticians to torture the data?
The thing is, the L-Shaped recovery indicates that the GDP rate will be significantly LOWER than the pre-pandemic period!
But there’s more.
Figure 4
Surprisingly, the Retail GDP, which posted a 6.4% growth in Q3, regained the losses from 2020, even as household spending continued to trail it substantially. Incredible. (Figure 4, upper pane)
With tourism in a slump, which entities bought goods and services to fill the gap between the household and the retail GDP? Martians?
Had lost sales of the thousands of closed shops been replaced by a burst of sales in the surviving ones?
I have yet to see the performance of the retail segment of SM Investments, a key yardstick. But anent the sales performance of the listed retail firms, so far, none has come close to their pre-pandemic conditions as suggested by the GDP.
Interestingly, 3Q GDP boosted the share of the bubble sectors led by the financial sector! As the economy materially evolves, the most leveraged sectors that have driven the GDP retain the same trajectories that have massively increased concentration risks! (Figure 4, middle pane) [more on this in the future]
VII. Public Spending: the Unheralded Driver of the 3Q GDP! A GDP of the Metaverse Economy?
While the mainstream sees the consumers as the primary drivers, it is odd how the mainstream forgot about the role of the government and their record deficits financed by the record public debt on the GDP. (Figure 4, lowest pane)
Even while the exemplary GDP of household spending boosted its share, it was not powerful enough to reverse its long-term trend. As a share of the GDP, household spending continues to lose ground. Yes, it bounced in Q3, but the downtrend remains. (Figure 5, topmost window)
Imagine, mainstream experts have been piling upon one another in recommending the consumer market, even when their most venerated data tells them that the low-hanging fruit has been picked!
At the end of the day, like JFC, instead of growing the domestic market, it has opted to do a Pac-Man strategy of gobbling up domestic non-competitors (horizontal expansion) and expanding more overseas.
Jollibee’s Fantastic Paradigm Shift: From Consumer Value to Aggressive Debt-Financed Pacman Strategy, March 3, 2019
On the other hand, the GDP share of central government spending activities continues to accelerate higher. It began its uptrend in 2014 and found momentum in 2016.
In Q3, the share of public spending reached 15.6%, the second-highest in a quarter.
In the meantime, construction represents the largest segment of gross fixed capital. Government construction, primarily through infrastructure spending, has presently captured a significant share of it. And this is apart from Government Final Consumption Expenditure or public expenditures. (Figure 5, middle window)
Including public construction, the public spending share of GDP surges to 19.8%!
These only include the direct spending of the national government. Spending by the private sector through Private-Public Partnerships (PPP) and related projects, aside from private sector supply networks of the bureaucracy, are not included.
The bottom line is that the resources and financing allocated directly and indirectly to government activities are far greater than accounted for by the GDP.
In addition, the BSP’s direct and indirect financing of public debt has been instrumental in funding the record deficits, the rescue of the banking system, and the shaping of the BSP’s balance sheet. (Figure 5, lowest pane)
Needless to say, because the government does not produce wealth, such public spending binges come at the expense of productive activities that diminish investments, employment, capital, and consumption.
High GDP reflects on the monetary policies than these are on productivity. Austrian Economist Patrick Barron explained
Remember, GDP measures consumer spending. If the public buys the same goods in the same quantities yet the price is higher, then a rising GDP does not represent rising wealth or prosperity. If prices rise faster than the public's spending ability, then it is possible that fewer goods are being sold at much higher prices. In this case the public actually is worse off, yet GDP would show otherwise.
Patrick Barron, GDP Tells Us Little about the Health of an Economy, October 20, 2021, Mises.org
One of the trendy words in today’s digital economy is Metaverse. Facebook rebranded itself to Meta, which according to the New Scientist, represents Metaverse, “the name for a shared online 3D virtual space that a number of companies are interested in creating as a sort of future version of the internet.”
Seen differently, the Philippines 3Q GDP may be a product of metaverse: growth in virtual and or augmented reality.
Or it may be seen in the same way as the Philippine political electoral setting has been shaping up: a circus (intended to distract the public).
Yours in liberty,
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