The vulgar Keynesian focus on consumption
unfortunately tempts politicians to approve “stimulus” measures aimed at
pumping up this part of total spending…Such arguments, however, fail to grasp
the true nature of the boom-bust cycle, especially the central role of
investment spending in driving it—and, more important, in driving the long-run
growth of real output that translates into a rising standard of living for the
general public. Politicians, if they truly wish to promote genuine, sustainable
recovery and long-run economic growth, need to focus on actions that will
contribute to a revival of private investment, not on pumping up consumption—Robert
Higgs
In this issue
Q1 2025 5.4% GDP: The
Consensus Forecast Miss and the Overton Window’s Statistical Delusion
I. BSP’s Easing Cycle and Mainstream’s
GDP Expectations
II.
The Big Consensus Miss Versus a Contrarian View of the GDP
III. On GDP:
Methodological Skepticism and Political Incentives
IV. The Financialization
of the Economy and the Raging Bank Stock Market Bubble!
V. Slowing Liquidity and
Money Supply Trends
VI. Fiscal Surge
Confirmed: Government Spending as the Main Growth Driver: A Shift in GDP
Composition
VII. The Fiscal Cost of
Stimulus Driven GDP: Record Public Debt
VIII. Employment Paradox:
Full Employment, Slower GDP—What’s Going On?
IX. Labor Force Shrinking
Amid Population Growth, why? Low-Skilled Workforce = Vulnerable to Inflation
X. Liquidity as a Mirror
of the GDP; Phase Two of BSP’s Easing Cycle
XI. Salary Loans: A Proxy
for Financial Distress?
XII. CPI Distortions and
Price Controls; CPI Spread Headline versus the Bottom 30%: Hunger vs. Hope
XIII. Conclusion: The
Politics of Numbers: GDP and the CPI, Faith in the Overton Window
Q1 2025 5.4% GDP: The
Consensus Forecast Miss and the Overton Window’s Statistical Delusion
A crucial Q1 2025 GDP forecast miss by the consensus, and
why embracing mainstream ideas can be perilous for investors.
I. BSP’s Easing Cycle
and Mainstream’s GDP Expectations
Q1 2025 GDP should fully reflect the initial phase of the
Bangko Sentral ng Pilipinas’ (BSP) easing cycle, launched in the second half of
2024 with three interest rate cuts and a reduction in the reserve requirement
ratio (RRR).
While this policy shift may be touted as stimulating
credit growth and investment, its actual goal may be to inject liquidity into
the system while simultaneously lowering debt servicing costs.
The combined effects of the 2024 and 2025 easing phases
are expected to influence the performance of Q2 and first-half 2025 GDP
II. The Big Consensus
Miss Versus a Contrarian View of the GDP
Figure 1Two days before the Philippine Statistics Authority (PSA)
released its Q1 2025 GDP estimates, consensus forecasts predicted a robust 5.9%
growth rate. We challenged this optimism, arguing (in x.com) that it
likely overestimated actual performance. (Figure 1, upper image)
Three critical indicators provide essential clues to the
economy’s trajectory:
1. Bank
Revenues Signal Weakening Demand
First, the combined Q1 2025 gross revenues of two of the
Philippines’ largest banks, BDO Unibank [PSE: BDO] and Metropolitan Bank &
Trust [PSE:MBT], recorded a fourth consecutive quarterly decline since Q1 2024,
with Q1 2025 marking the sharpest deceleration.
Given that their revenues accounted for approximately
1.72% of 2024 nominal GDP (NGDP), this slowdown signals broader economic
weakness.
Despite aggressive lending, banks appear to be yielding
diminishing returns. That said, while banks may be aggressively lending, they
may not be "getting a bang for their buck," as an old saw goes.
This trend underscores inefficiencies in credit
allocation, potentially dampening economic activity.
And yes, Financial GDP slowed in Q1 (Figure 1, lower
window)
2.
Declining Headline CPI Reflects Softening Demand
Headline CPI has now posted three consecutive quarters of
decline. We interpret this not merely as a result of supply-side adjustments
but primarily as a reflection of weakening aggregate demand—a point we have
consistently emphasized.
3.
Fiscal Stimulus: Record Q1 Deficit-Financed Spending
Figure 2 Third, public spending surged in Q1 2025, resulting in a
record fiscal deficit for the period. This aggressive expenditure, designed to
bolster GDP, was highlighted in last
week’s analysis. (Figure 2, upper graph)
However, this strategy carries risks, including crowding
out private sector activity and exacerbating public debt.
4.
Trendlines and Economic Realities: The Shift to a Slower Growth Path
Using the PSA’s peso-denominated figures, nominal GDP
(NGDP) and real GDP (rGDP) reveal a secondary trendline that has guided
economic performance since the pandemic recession. (Figure 2, lower visual)
Seen from this perspective, this second trendline
essentially extrapolates to a slowing GDP trajectory.
With that said, unless
the economy regains its primary growth path, this downward trend will persist,
operating under the shadow of significant downside risks.
We are both amused and amazed by the pervasive
optimism—or mass delusion—among establishment analysts, who consistently, or
rather perpetually, echo official predictions rather than scrutinizing actual
data.
This tendency, aimed at shaping the Overton Window—the
range of ideas deemed acceptable in public discourse—reflects a patent disconnect
from economic realities.
III. On GDP:
Methodological Skepticism and Political Incentives
We are not staunch believers in GDP, which we believe is
determined and calculated for political purposes. It relies on structural
mismatches between the subjectivism of human actions and the
objectivism of the empirical analysis underlying it. Consequently, its
calculation is based on numerous flawed assumptions.
In any case, although authorities can manipulate figures
to promote their agenda (as neither the CPI nor GDP is subject to audit),
economic reality will ultimately prevail
Despite this, true enough, the Q1
2025 GDP growth rate of 5.4% fell significantly below consensus estimates, validating
our cautious outlook.
IV. The Financialization
of the Economy and the Raging Bank Stock Market Bubble!
The bank-finance sector’s real GDP growth slowed from
8.3% in Q1 2024 to 7.2% in Q1 2025. (Figure 1, upper chart, again)
Despite this deceleration, its outperformance relative to
other sectors boosted its GDP share to a record 11.7%, signaling the deepening "financialization"
of the Philippine economy.
Strikingly, despite this, bank GDP growth substantially
slowed over the last five quarters, from Q1 2024 to Q1 2025 (13.1%, 10.2%,
8.7%, 6.5%, and 5%), affirming my analysis.
The Raging Financial Stock Market Bubble
Figure 3 Despite this, the PSE’s bank-dominated financial index
continues to hit all-time highs (including this Friday or May 9)—more evidence
of the disconnect between share prices and fundamentals or a growing sign of a
stock market bubble. (Figure 3, topmost diagram)
Instead of widespread public participation, its less
apparent nature stems from rising share prices being driven mainly by the
"national team" or the BSP's cartel- network of banks and financial
institutions.
Bear in mind, the free float market cap share of the top
three banks has been instrumental in supporting and currently driving the PSEi
30 to its present levels.
BDO, BPI, and MBT account for 24.2%—up from a low of
12.76% in August 2020—while including CBC, this rises to 25.9% of the PSEi 30
(as of May 9). These four listed banks rank among the top 10 by free float
market cap. (Figure 3, middle chart)
The banks’ outperformance coincides with, or bluntly
put, stems from, the BSP’s historic rescue efforts and massive subsidies during
the pandemic, which have been carried over to this day.
The percentage share of turnover of the top five banks in
the financial index has averaged 23% of the main board volume Year-to-date—indicating
a heavy buildup of concentration activities or risk.
In any case, while banks constitute 60% of the sector’s
GDP, the outperformance of non-banks and insurance companies buoyed the
sector’s GDP.
V. Slowing Liquidity
and Money Supply Trends
Liquidity conditions eased further in Q1 2025, with the money
supply-to-GDP ratio (M2 and M3) continuing its downward trajectory. (Figure
3, lowest image)
This trend, which accelerated from 2013 to 2018 and
spiked during the 2019–2020 pandemic recession with the BSP’s Php 2.3 trillion
injection, has significantly influenced CPI through what the mainstream
calls "aggregate demand."
In the current phase of this cycle, since peaking in
2021, this key measure of credit-driven demand has slowed, contributing significantly to the
recent CPI slowdown.
VI. Fiscal Surge
Confirmed: Government Spending as the Main Growth Driver: A Shift in GDP
Composition
The third indicator reinforcing our analysis is public
spending.
Figure 4Q1 2025 expenditures surged by 22.43%, outpacing revenue
growth and resulting in a record Q1 fiscal deficit of Php 478 billion.
This nominal spending boom translated into a significant
GDP contribution, with government spending GDP spiking by 18.7%—the highest
since Q2 2020—excluding government construction spending! (Figure 4, topmost graph)
However, consumer spending GDP, while rising from 4.7% in
Q4 2024 to 5.3% in Q1 2025, saw its share of national GDP decline from 74.7% to
74.3%. (Figure 4, second to the highest window)
In contrast, government GDP’s share rose from 12.3% to
15.9%, reflecting a structural shift.
These numbers reflect an ongoing trend: they reveal the
peak of consumer spending at 80.6% in Q3 2002, which steadily declined to the
2020 range (67–75%), while conversely, since its 8% low in Q4 2005, government
GDP has nearly doubled, with its trend accelerating since 2020.
All these are evidence that there is no such thing as a
free lunch, as whatever the government takes from the private sector for its
expenditures or consumption comes at the latter’s expense—the crowding-out
syndrome in motion.
VII. The Fiscal Cost of
Stimulus Driven GDP: Record Public Debt
This shift comes at a cost—record Q1 2025 public debt.
Public debt soared from Php 16.05 trillion in Q4 2024 to a historic
Php 16.68 trillion, a net increase of Php 633 billion, financing the
period’s Php 478.8 billion fiscal deficit!
This quarterly debt increase, the highest since Q3 2022,
reflects an upward trend! (Figure 4, second to the lowest chart)
Furthermore, a weaker US dollar in March tempered debt
growth, reducing the foreign exchange (FX) debt share to 31.8%. However, the FX
debt share has been rising since its March 2021 trough. (Figure 4, lowest graph)
Consequently, Q1 2025’s deficit-to-GDP ratio surged to
7.27%, far exceeding the government’s 5.3% target!
Looking at all this, both macro (CPI, deficit spending)
and micro (bank revenues, bank GDP) factors have converged to highlight a
significant economic slowdown, yet despite the establishment’s
cheerleading, the diminishing returns of artificial growth driven by implicit
backstops—BSP easing and fiscal stimulus—will gradually take their toll and
heighten risks.
As it stands, this marks another round for this
contrarian analyst.
VIII. Employment
Paradox: Full Employment, Slower GDP—What’s Going On?
Let us now examine the other critical forces shaping the
statistical economy—GDP.
Figure 5 Not one among the establishment punditry seems to ask:
While the Philippine economy nears full employment, instead of a boost, GDP has
been declining—what the heck is going on?
Employment
reached 96.1% in March 2025, averaging 96.02% in Q1 2025 and 95.9% over the
25 months since January 2023, according to Philippine Statistics Authority
(PSA) data. (Figure 5, topmost visual)
However, this near-full employment masks structural
weaknesses.
Consumer per capita GDP, which peaked at 8.98%
year-on-year in Q2 2021, has decelerated, with Q1 2025’s 4.4% growth—up
slightly from 3.84% in Q4 2024—marking the second-slowest pace since the
pandemic.
IX. Labor Force
Shrinking Amid Population Growth, why? Low-Skilled Workforce = Vulnerable to
Inflation
While the workforce population continues to grow, the
labor force participation rate has formed a "rounding top" pattern,
indicating a gradual peak and a potential decline. In simpler terms, more
people are being counted outside the labor force. (Figure 5, middle diagram)
Why is this happening?
A recent Congressional report on functional illiteracy in
the education sector provides a critical clue.
The
Manila Times, May 7, 2025: "BETWEEN 2019 and 2024, 18 million students
graduated from the country's basic education system despite being functionally
illiterate. This was found by the Senate Committee on Basic Education during
its April 30, 2025 hearing on the initial results of the 2024 Functional
Literacy, Education, and Mass Media Survey (Flemms)."
Assuming 16.2 million of these graduates remain in the
labor force or are employed, while 10% (1.8 million) have joined the "not
in the labor force" category (due to migration, mortality, or
disengagement), approximately 32% of the labor force or 33% of the employed
population is engaged in low-skilled work
That’s right. Despite near full-employment data from the
PSA, a large segment of the workforce is likely in low-skill, low-wage jobs,
possibly concentrated in MSMEs or previously informal sectors, often earning at
or below the minimum wage.
This dovetails with Social Weather Stations (SWS) sentiment
surveys, which continue to show elevated self-rated
poverty (April 2025) and milestone hunger
rates in Q1 2025.
In a nutshell, the most vulnerable population
segments—those in low-wage, low-skilled jobs—are also the most exposed to
inflation.
These dynamics explain why poverty perceptions remain
high despite supposedly strong employment numbers.
The shrinking labor force could also be a symptom of
“grade inflation,” producing a flood of graduates ill-equipped for skilled
work.
A closer look at PSA employment classifications reveals
more. From January 2023 to March 2025, full-time employment averaged 67.3%,
while part-time work averaged 31.9%.
This implies a substantial portion of the workforce is underemployed
or working in precarious conditions. The near-full employment figures
may therefore overstate the true health of the labor market.
In effect, the PSA’s employment data provides a façade—masking
the fragility of both the labor market and broader economy.
This explains the sluggish per capita consumption and,
by extension, the national GDP.
X. Liquidity as a
Mirror of the GDP; Phase Two of BSP’s Easing Cycle
Following the BSP’s historic rescue of the banking system
during the pandemic, money
supply metrics—particularly M1—have closely tracked GDP trends. (Figure 5,
lowest chart)
GDP peaked in Q1 2021, following the M1-to-GDP spike from
Q3 2019 to Q3 2023. This spike reflected the pre-pandemic bank credit expansion,
intensified by the BSP’s Php 2.3 trillion liquidity injection and other
pandemic-related rescue measures.
Since then, both GDP and M1 have slowed in tandem, though
M1 has decelerated at a faster rate.
This matters, because M1—comprising cash in
circulation and demand deposits—underpins the transactions that generate
GDP.
Despite the BSP’s initial easing cycle in 2H 2024,
liquidity growth continues to decelerate, even as Universal-Commercial
bank credit expansion reaches record highs in peso terms (Q1, 2025)
The lack of liquidity response to the first easing
cycle prompted the BSP to implement a second phase: a deeper RRR cut,
the doubling
of deposit insurance coverage, and a fourth policy
rate cut in April.
However, monetary policy can only do so much in the face
of structural issues.
XI. Salary Loans: A
Proxy for Financial Distress?
Figure 6Wage earners are increasingly relying on salary
loans to bridge the gap to offset reduced purchasing power
While total salary loans (in pesos) have reached all-time
highs, the growth rate of these loans has been slowing since Q1 2022—(strikingly)
mirroring the trend in headline CPI. (Figure 6, topmost chart)
However, slowing growth raises questions: Has the banking
system reached peak salary loans?
Has the pool of eligible borrowers maxed out? Are
employees hitting credit limits for salary loans? Or are rising non-performing
loans (NPLs) forcing lenders to tighten? (Figure 6, middle graph)
Either way, the data signals distress among
middle-income and lower-income workers, who are increasingly stretched and
vulnerable.
XII. CPI Distortions
and Price Controls; CPI Spread Headline versus the Bottom 30%: Hunger vs. Hope
Headline
CPI fell to just 1.4% in April (for 2Q GDP)—driven mainly by sharp food
price declines.
Yet little is said about the regulatory basis for
this fall. Both rice
and pork prices are subject to quasi-price controls via Maximum
Suggested Retail Prices (MSRPs). And even here, compliance—particularly
for pork—has been reportedly low. (Figure 6, lowest image)
Figure 7Core CPI stabilized at 2.2% in April 2025, outperforming
headline CPI since the MRSP. This reinforces the headline CPI’s decline due to
regulatory maneuvers. The core index’s downtrend since Q2 2023 signals
persistent demand weakness.
However, rising month-on-month (MoM) rates suggest a
potential bottom. This pattern mirrors previous episodes (2015, 2019), where
food prices fell below Core CPI, acting as a staging point for the next
inflation cycle. (Figure 7, topmost and middle charts)
Regulatory and statistical distortions raise doubts about
whether CPI distortions accurately reflect real market conditions.
Another revealing metric is the spread between the
national CPI and the Bottom
30% CPI, where food deflation for the Bottom 30% in April drove the spread
sharply negative—reaching its lowest level since 2022—yet, while these numbers
suggest that falling food prices for the poor should reduce hunger, the latest
SWS survey indicates persistently high hunger rates. (Figure 7, lowest graph)
Once again, the statistical data points diverge from
lived experience.
XIII. Conclusion: The
Politics of Numbers: GDP and the CPI, Faith in the Overton Window
The government’s CPI reveals numerous distortions,
clearly being manipulated downward through regulation and statistical
adjustments "benchmark-ism" to justify the BSP’s continued easing cycle, aimed at addressing
debt and liquidity dynamics, as well as boosting GDP—which the establishment
promotes as a stimulus.
Yet behind the curated optimism—such as "upper-middle-income
status"—lies a more disturbing truth: government statistics
increasingly defy both economic logic and market signals.
Market prices—USD Philippine peso exchange rate and
Philippine Treasury yields—offer little support for these narratives.
And yet, the Overton Window shaped by official optimism
persists.
Analysts, pundits, and policymakers alike remain obsessed
with the hope it offers—ignoring hard realities staring them in the
face.
Until these contradictions are resolved, the statistical
economy and the real economy will continue to drift further apart.
Or, confronting these realities is essential to
understanding the Philippine economy’s true trajectory.