Philippine Treasury Markets vs. the Government’s February 2.1% Inflation Narrative: Who’s Right?

 

Inflation is a tax. Money for the government. A tax that people don’t see as a tax. That’s the best kind, for politicians—Lionel Shriver 

In this issue

Philippine Treasury Markets vs. the Government’s February 2.1% Inflation Narrative: Who’s Right?

I. February Inflation: A "Positive Surprise" or Statistical Mirage?

II. Demand Paradox: Near Full-Employment and Record Credit Highs in the face of Falling CPI and GDP?

III. The Financial Black Hole: Where Is Bank Credit Expansion Flowing?

IV. The USDPHP Cap: A Hidden CPI Subsidy

V. Markets versus Government Statistics: Philippine Treasury Markets Diverge from the CPI Data 

Philippine Treasury Markets vs. the Government’s February 2.1% Inflation Narrative: Who’s Right? 

With price controls driving February CPI down to 2.1%, the BSP’s easing narrative gains traction—yet treasury markets remain deeply skeptical

I. February Inflation: A "Positive Surprise" or Statistical Mirage?

ABS-CBN News, March 5: Inflation eased to 2.1 percent in February because of slower price increases in food and non-alcoholic beverages, among others, the Philippine Statistics Authority said Wednesday. In a press briefing, the PSA said food inflation slowed to 2.6 percent in February from 3.8 percent in January. The state statistics bureau noted that rice inflation further slowed to -4.9 percent from -2.3 percent in January…But the PSA noted that pork prices jumped by 12.1 percent in February, while the price of chicken meat leapt by 10.8 percent.  The cost of passenger transport by sea also soared to 56.2 percent in February.  Del Prado said the African swine fever problem continue to hurt pork prices in the Philippines. She said, however, that the Department of Agriculture’s plan to impose a maximum suggested retail price on pork may help ease price hikes. 

The Philippine government recently announced that inflation unexpectedly dropped to 2.1% in February 2025. One official media outlet hailed it a "positive surprise" in its headline. 

But is this optimism warranted? 

While the Philippine Stock Exchange (PSE)—via the "national team"—welcomed this news, interpreting it as a sign that the Bangko Sentral ng Pilipinas (BSP) could continue its loose monetary policy—essentially providing a pretext for rate cuts—the more critical Philippine treasury markets, which serve as indicators of interest rate trends, appeared to hold a starkly different view. 

As an aside, the BSP’s reserve requirement ratio (RRR) cut takes effect this March 28th, adding fuel to the easing narrative. 

The odd thing is that a critical detail has been conspicuously absent from most media coverage: on February 3, 2025, authorities implemented the "Food Emergency Security" (FES) measure. 

This policy, centered on price controls—specifically Maximum Suggested Retail Prices (MSRP)—was supported by the release of government reserves. 

Consequently, February’s Consumer Price Index (CPI) reflects political intervention rather than organic market dynamics.

Figure 1

Even more telling is an overlooked trend: the year-on-year (YoY) change in the national average weighted price of rice had been declining since its peak in April 2024—well before the FES was enacted. (Figure 1, topmost graph) 

In a nutshell, the FES merely reinforced the ongoing downtrend in rice prices, serving more as an election-year tactic to demonstrate government action "we are doing something about rice prices," rather than an actual cause of the decline. 

Nevertheless, it won’t be long before officials pat themselves on the back and proclaim the policy a triumph. Incredible. 

But what about its future implications? 

Unlike rice, where government reserves were available to support price controls, the impending implementation of MSRP for pork products next week lacks similar supply-side support. This suggests that any price stabilization achieved will be short-lived. (Figure 1, middle chart) 

As noted in February,  

However, as history shows, the insidious effects of distortive policies surface over time. Intervention begets more intervention, as authorities scramble to manage the unintended consequences of their previous actions. Consequently, food CPI remains under pressure. (Prudent Investor, 2025)  

Nevertheless, manipulating statistics serves a political function—justifying policies through "benchmark-ism."  

Beyond food prices, which dragged down the headline CPI, core CPI also eased from 2.6% in January to 2.4% in February. 

Despite this pullback, the underlying inflation cycle appears intact. (Figure 1, lowest image) 

Government narratives consistently frame inflation as a ‘supply-side’ issue or blame it on "greedflation," yet much of their approach remains focused on demand-side management through BSP’s inflation-targeting policies. 

II. Demand Paradox: Near Full-Employment and Record Credit Highs in the face of Falling CPI and GDP? 

Authorities claim that employment rates have recently declined but remain near all-time highs. 

But how true is this?

Figure 2

The employment rate slipped from an all-time high of 96.9% in December 2024 to 95.7% in January 2025—a level previously hit in December 2023 and June 2024. (Figure 2, topmost image) 

Remarkably, despite near-full employment, the CPI continues to slide. 

Officials might argue this reflects productivity gains.  But that claim is misleading.

Consumer credit growth—driven by credit cards and supported by salary loans—has been on a record-breaking tear, rising 24.4% YoY in January 2025, marking its 28th consecutive month above 20%. (Figure 2, middle window) 

Yet, unlike the 2021-2022 period, headline CPI has weakened. 

Could this signal diminishing returns—mainly from refinancing? 

Beyond CPI, total Universal-Commercial (UC) bank loans have surged since Q1 2021—unfazed by official interest rate levels. (Figure 2, lowest diagram)

Figure 3

The slowing growth in salary loans seems to mirror the CPI’s decline. (Figure 3, upper pane) 

And it’s not just inflation. 

Despite an ongoing surge in Universal-Commercial (UC) bank loans since Q1 2021—regardless of official interest rate levels—weak consumption continues to weigh on GDP growth. The second half of 2024 saw GDP growth slow to just 5.2%. (Figure 3, lower chart) 

This boom coincides with record real estate vacancies, near unprecedented hunger rates, and almost milestone highs in self-reported poverty. 

So, where has demand gone? 

In January 2025, UC bank loans (both production and consumer) increased by 13.27% year-on-year. 

Are the government’s employment figures an accurate reflection of labor market conditions? Or, like CPI data, are they another exercise in "benchmark-ism" designed to persuade voters and depositors that the political economy remains stable? 

III. The Financial Black Hole: Where Is Bank Credit Expansion Flowing?

Figure 4 

Ironically, bank financing of the government, as reflected in Net Claims on the Central Government (NCoCG), continues to soar—up 7.4% year-on-year to PHP 5.41 trillion in January 2025, though slightly down from December 2024’s historic PHP 5.54 trillion. 

Meanwhile, since bottoming at 1.5% in April 2023, BSP currency issuance has trended upward, accelerating from May 2024 to January 2025, when it hit 11% YoY. (Figure 4, topmost graph) 

Despite this massive liquidity injection—via bank lending and government borrowing—deflationary forces persist in the CPI. 

Where is this money flowing? What "financial black hole" is absorbing the injected liquidity? 

IV. The USDPHP Cap: A Hidden CPI Subsidy 

The recent weakness of the US dollar—primarily due to a strong euro rally following U.S. President Trump’s pressure on Europe to increase NATO contributions—has driven up the region’s stock markets, particularly defense sector stocks. This, in turn, has triggered a global bond selloff.

The euro’s strength has also bolstered ASEAN currencies, including the Philippine peso. 

As predicted, the BSP’s cap on the USD-PHP exchange rate— a de facto subsidy—has fueled an increase in imports. In January, the nation’s trade deficit widened by 17% to USD 5.1 billion due to a 10.8% jump in imports. (Figure 4, middle window) 

Further, to defend this cap, the BSP sold significant foreign exchange (FX) in January, only to replenish its Gross International Reserves (GIR) in February via a USD 3.3 billion bond issuance. The BSP attributes the GIR increase to "(1) national government’s (NG) net foreign currency deposits with the Bangko Sentral ng Pilipinas (BSP), which include proceeds from its issuance of ROP Global Bonds, (2) upward valuation adjustments in the BSP’s gold holdings due to the increase in the price of gold in the international market, and (3) net income from the BSP’s investments abroad." (Figure 5, lowest visual) 

This disclosure confirms the valuable role of gold in the BSP’s reserves. 

In short, the USD-PHP cap has not only subsidized imports but has also artificially suppressed the official CPI figures. 

From 2015 to 2022, the ebbs and flows in the USD-PHP exchange rate were strongly correlated with CPI trends.  

Figure 5

However, since 2022, when the exchange rate cap was strictly enforced, this relationship has broken down, increasing pressure on the credit-financed trade deficit and necessitating further borrowing to sustain both the cap and the Gross International Reserves (GIR). (Figure 5, topmost image) 

V. Markets versus Government Statistics: Philippine Treasury Markets Diverge from the CPI Data 

First, while global bond yields have risen amid the European selloff, this has not been the case for most ASEAN markets—except for the Philippines. This suggests that domestic factors have been the primary driver of movements in the ASEAN treasury markets, including the Philippines. (Figure 5, middle and lowest graphs)

Figure 6

Second, it is important to note that institutional traders dominate the Philippine treasury markets. This dynamic creates a distinction between the public statements of their respective "experts" and the actual trading behavior of market participants—"demonstrated preferences." 

The apparent divergence between the CPI and Philippine 10-year bond yields—despite their previous seven-year correlation—reveals disruptions caused by other influencing factors. (Figure 6, upper chart) 

Or, while analysts often serve as institutional cheerleaders for the traditional market response to an easing cycle, traders seem to be reacting differently.

Finally, further cementing this case for decoupling, the Philippine yield curve steepened (bearish steeper) during the week of the CPI announcement—suggesting that treasury markets are pricing in future inflation risks or tighter policy, potentially discounting the recent CPI decline as temporary. (Figure 6, lowest graph) 

All in all, while the government and the BSP claim to have successfully contained inflation, treasury markets remain highly skeptical—whether about the integrity of the data, the sustainability of current policies, or both. 

Our bet is on the latter.

___

References  

Prudent Investor, January 2025 2.9% CPI: Food Security Emergency andthe Vicious Cycle of Interventionism February 10, 2025

 

Q4 and 2024 GDP: Consumer and Capital Spending Stagnates as Bank-GDP Concentration Risks Deepen

  

The government pretends to be endowed with the mystical power to accord favors out of an inexhaustible horn of plenty. It is both omniscient and omnipotent. It can by a magic wand create happiness and abundance. The truth is the government cannot give if it does not take from somebody—Ludwig von Mises 

In this issue

Q4 and 2024 GDP: Consumer and Capital Spending Stagnates as Bank-GDP Concentration Risks Deepen

I. The GDP’s Critical Defects

II. The Mainstream Narrative is Failing

III. Philippine GDP Predicament: Full Employment and Record Credit, Yet Slowing Consumption?

IV. Malinvestments: Retail Expands While Consumer Spending Stagnates

V. Proposed Minimum Wage Hikes to Compound Consumer Woes

VI. Q4 GDP versus SWS’ Q4 Milestone Highs in Self-Poverty Ratings and Hunger; Critical Questions

VII. Q4 GDP Boosted by Government Spending, Services Exports and Private Sector Construction

VIII. Q4 GDP’s Industry Side: Boost from Public Administration and Defense and other Related Sectors

IX. Q4 2024 Boosted by Financialization Even as Manufacturing and Real Estate Sector Languish; Deepening Bank-GDP Concentration Risks

X. More Signs of Consumer Weakening: Material Slowing ‘Revenge Travel’ and Outside Dining GDP

XI. Summary and Conclusion

Q4 and 2024 GDP: Consumer and Capital Spending Stagnates as Bank-GDP Concentration Risks Deepen 

Q4 and 2024 GDP were another big miss for the establishment. Government spending played a pivotal role in boosting growth, while consumers were sidelined. There is little awareness that the former indirectly causes the latter 

I. The GDP’s Critical Defects 

Inquirer.net January 31, 2025: The Marcos administration missed its growth target for the second straight year in 2024, falling below consensus after the onslaught of destructive typhoons had muted the typical surge in economic activities during the holiday season. Gross domestic product (GDP), the sum of all products and services created within an economy, expanded at an average rate of 5.6 percent for the entire 2024, the Philippine Statistics Authority (PSA) reported on Thursday…At the same time, last year’s performance failed to meet market expectations after settling below the median estimate of 5.8 percent in an Inquirer poll of 12 economists…The statistics agency reported that GDP had expanded by 5.2 percent in the fourth quarter, unchanged from the preceding three months and lower than the year-ago print of 5.5 percent. That was also below the median forecast of 5.8 percent. 

Our preface: the BSP cut official rates in August, October, and December. It also reduced RRR rates in October, while the aggregate fiscal spending in 11-months reached all-time highs (ATHs), signaling massive stimulus or Marcos-nomics. 

Despite this, the Philippine GDP registered 5.2% in Q4 and 5.6% in 2024. 

Although GDP provides insight into how economic output is distributed across sectors—categorized by expenditure and industry—it does not present the equivalent allocation of spending by income class. 

Therefore, it is arguable that the headline figure makes a critically flawed assumption by suggesting that the statistical spending growth applies to the average. 

In other words, it assumes that the average citizen has experienced 5.2% growth in Q4 and 5.6% growth overall. The question, however, is how do you aggregate the spending of a few billionaires with that of those living in poverty? 

And this applies to the inflation deflator used to calculate the headline figure as well: How accurate is it to derive an average inflation rate from a mishmash of diverse spending items like a mobile gaming subscription, rice, and vehicle wheels? 

Apples and oranges, you say? Exactly.

If the nominal GDP and the deflator are flawed, why should we trust that the headline estimates reflect reality?

II. The Mainstream Narrative is Failing 

Every start of the year, mainstream experts proclaim at the top of their lungs that GDP will align with sanguine government targets. Some even tout the likelihood of the economy reaching "middle-income status."

Beyond abstract reasoning, they rarely explain the mechanics of how they arrive at their estimated figures.

Either they ignore the data provided by the Philippine Statistics Authority (PSA), or their forecasts are based on a 'pin-the-tail-on-the-donkey' approach—bluntly put, faith in magic.

What does the PSA data reveal?

Figure 1

It shows that since the post-pandemic recession, GDP has operated within a secondary trendline. This means that despite occasional growth spikes, GDP growth will be SLOWER than in the pre-pandemic era. (Figure 1, topmost pane)

Using the exponential trend as a gauge, we see that Q4 GDP consistently exceeds the trendline but eventually retraces to the secondary support in the following quarters.

The same dynamic applies to the 2024 GDP. (Figure 1, middle graph)

The point having been made, realize that for GDP to meet the mainstream's numbers, it would require a significant breakthrough not only to reclaim the pre-pandemic trend but also to sustain it.

From a statistical standpoint, none of this is happening. Even the PSA’s chart reinforces the notion of a slowing GDP. (Figure 1, lowest chart)

Figure 2 

As evidence, the government has struggled to wean itself off debt-financed pandemic deficits relative to GDP, which have served as a quasi-stimulus. Data reveals that they have become addicted to it. (Figure 2, topmost image) 

Why, then, do they yearn for pre-pandemic GDP figures? 

Incredible.

Statisticians-cum-economic experts often don't disclose that their perpetually optimistic forecasts might be about placating or bootlicking the government.

Why? For business and personal reasons. They might want to secure government contracts, underwrite debt issuance, intermediate stock trading, or gain accreditation as credit appraisers, among other things. On a personal level, they seek social desirability or good standing with officials for career advancement (revolving door politics), off-table deals, etc. In short: the principal-agent dilemma.

Essentially, overstating GDP or understating CPI numbers, or the mainstream's erroneous forecasts, come with no consequences for them—they have no "skin in the game."

However, for many in the investing public, consensus projections guide corporate strategies or investments in financial markets.

It’s unsurprising, then, that in addition to distortions in capital goods pricing due to stock market mispricing, overly optimistic guidance often leads to “build-and-they-will-come” debt-fueled malinvestments.

Many also invest their hard-earned savings in financial markets (stocks or fixed income) in the hope of achieving real or inflation-adjusted positive returns, without realizing that their investments are silently transferring wealth to politically connected economic elites, who are absorbing unsustainable amounts of debt.

And remember the inflation spike of 2022? NONE of these experts saw it coming.

In clear words, forecasts based on the principal-agent problem will likely keep the public blind to the escalating risks of a crisis.

Here's an example:

Businessworld, January 24: PROPERTY developers in the Philippine capital need to enhance their market research and consider lowering condominium prices to address the current “mismatch” between available units and buyer demand, according to property analysts. “These overpriced condos aren’t matching with the existing buyers…There are so many buyers, as in we’re talking millions of buyers, but the issue is they cannot afford [a condo in Metro Manila] anymore” (bold added) 

The mainstream’s narrative is failing: Expect more to come. 

III. Philippine GDP Predicament: Full Employment and Record Credit, Yet Slowing Consumption? 

Let's conduct a brief investigation into the PSA's GDP data. 

The government's statistics are riddled with paradoxical figures.

First, the government claims that the employment rate (as of November) has reached nearly its highest level. (Figure 2, middle chart)

Curiously, with low savings, how have entrepreneurs managed to fund investments in real businesses, leading to near-full employment?

FDI numbers hardly support this. Despite a spike in October, the 10-month FDI flow was up by only 6.6%, with 68% of those inflows coming from debt. Debt inflows are no guarantee of “investment.”

The likely source of funds might be from banking loans. Over an 11-month period, consumer credit captured the largest share of the net increase in Universal-Commercial Bank loans at 23%, followed by real estate at 18.74%, electricity at 9.72%, and retail trade at 9.52%.

However, retail and agriculture, which account for the largest shares of the working population at 21.3% and 20% respectively, suggest a different story.

Next, fueled by credit cards and salary loans, consumer credit continues to grow at a breakneck pace, setting nominal records consecutively. (Figure 2, lowest graph)

Ironically, despite full employment and unprecedented consumer credit growth, Q4 2024 saw real consumer spending in GDP terms increase by only 4.7%, similar to Q2 and marking the second lowest since Q2 2011, excluding the period of the pandemic recession.

Stagnating household consumption was a key factor in pulling down the period's GDP.

Moreover, household GDP mirrored the deceleration in Q4 2024, with consumer per capita GDP growth at just 3.8%—the lowest since Q3 2017.

Important questions arise: 

-Where did all that record bank credit expansion go?

-How much of the consumer credit growth has been about refinancing existing debt?

-If productivity has been driving the GDP, why would a nation with full employment experience a sustained slowdown in household consumption?

In this context, government data on employment appears questionable.

IV. Malinvestments: Retail Expands While Consumer Spending Stagnates

Figure 3

What’s more, households are struggling with consumption, mainly due to the inflation tax, which continues to erode their spending power. At the same time, they are using leverage to maintain their lifestyles. As this occurs, retail GDP continues to outgrow consumer spending. (Figure 3, topmost window)

Partly due to the mainstream’s constant cheerleading, retail entrepreneurs are hopeful that the consumption slump will reverse soon, and so have been aggressively expanding capacity. Retail GDP grew by 5.5% in Q4 and has outpaced consumer spending in 3 of the last 4 quarters. (Figure 3, second to the highest image)

Or, to put it simply, because of the mainstream belief in the 'build it and they will come' dogma, supply continues to outpace demand.

V. Proposed Minimum Wage Hikes to Compound Consumer Woes

In the meantime, news reports that "the House Committee on Labor and Employment has approved a bill for a P200 across-the-board legislated wage hike."

Would this not function as a form of redistribution or a protective moat in favor of elite companies, at the expense of micro, small, and medium enterprises (MSMEs)? How would this incentivize grassroots entrepreneurship when authorities are effectively raising the cost of doing business or barriers to entry?

How would minimum wage laws not negatively impact consumption and productivity while acting as a drain on savings?

Quoting economist Thomas Sowell, "Minimum wage laws play Russian roulette with people who need jobs and the work experience that will enable them to rise to higher pay levels." (Sowell, 2006)

VI. Q4 GDP versus SWS’ Q4 Milestone Highs in Self-Poverty Ratings and Hunger; Critical Questions

And there’s more. How does the 5.2% GDP square with polls showing record highs in consumer stress: "Self-Rated Poverty at 63%, highest in 21 years" and "December 2024 hunger was… at the highest level since the record high 30.7% during the COVID-19 lockdowns in September 2020"? (Figure 3, second to the lowest and lowest charts)

While the government touts the 5.2% GDP, SWS found that 63% of Filipino families rated themselves as "Poor," while "25.9% of Filipino families experienced involuntary hunger."

Simply put, this reflects popular sentiment about inflation: a vast majority of the population feels harried by the peso’s loss of purchasing power, and a quarter of them have actually experienced hunger.

Incredible.

So, who is overstating their data—SWS or the government?

Here’s the thing: If the GDP growth is based on unsustainable leveraging, what would the ramifications be?

Or if consumer balance sheets have been burdened by excessive gearing (spend-now, pay-later) to cope with inflation, how would this affect the economy?

When consumers reach the proverbial tipping point of leveraging and begin to scale down, wouldn't this slow the GDP? Wouldn't credit delinquencies rise, affecting the banks' already strained liquidity?

Or, wouldn’t this reduce lending, exacerbating liquidity pressures in the banking system and increasing defaults?

Could this not lead to rising unemployment, creating a feedback loop that slows GDP, decelerates bank lending, and drives up credit delinquencies?

By the same token, what happens to the supply side’s debt-financed overcapacity? Wouldn’t this worsen pressures on unemployment, output, consumer spending, and negatively affect the health of the banking industry?

Wouldn't increasing sentiments of hunger and perceptions of poverty not lead to higher risks of social disorder? 

VII. Q4 GDP Boosted by Government Spending, Services Exports and Private Sector Construction 

If household consumption weighed down the GDP, which sectors propelled it upwards?

Figure 4

From the expenditure side of the data, the answer is the government, construction, and export services. 

Government GDP rose from 5% in Q3 to 9.7% in Q4. While construction GDP dipped from 8.8% to 7.8%, it still exceeded the 5.2% threshold. Private sector construction, driven by households (12.8%) and corporations (5.7%), powered the sector’s GDP, while government construction GDP stagnated at 4.7%. (Figure 4 topmost diagram)

Interestingly, while exports of goods entered a recession, declining by -0.37% in Q3 and -4.6% in Q4, services exports GDP surged from 2.3% to 13.5%, elevating the sector's performance from -1.4% in Q3 to 3.2% in Q4. (Figure 4 middle image) 

Curiously, real estate services firm CBRE reported in 2024 that "32 percent of vacated (office) spaces are from the IT-BPM sector." Why have service export firms like BPOs been downsizing if their businesses were reportedly booming, as suggested by the GDP figures? 

Meanwhile, gross capital formation fell sharply from 13.7% in Q3 to 4.1% in Q4, while durable goods GDP also plunged from 7.9% to just 0.1%. Unfortunately, this indicates a sluggish state of investments, which contrasts with the employment data. 

The expenditure side of the GDP shows that government spending was primarily responsible for the Q4 GDP boost, supported by services exports and private sector construction. However, it also reveals that while consumer spending has stagnated, capital spending has languished. 

VIII. Q4 GDP’s Industry Side: Boost from Public Administration and Defense and other Related Sectors 

On the industry side, sectors like transport (9.5%), financial and insurance (8.5%), professional and business services (8.3%), public administration and defense (7%), education (6.2%), and health (12.1%) all grew above the GDP rate. 

Or, to put it another way, outperforming government and related sectors contributed about 10% of the industry's GDP. 

After the 2020 spike, the share of public administration and defense in GDP remains elevated compared to pre-pandemic levels. This should come as no surprise, as the government is focused on centralization, partly driven by a subtle shift toward a war economy. (Figure 4 lowest graph)

IX. Q4 2024 Boosted by Financialization Even as Manufacturing and Real Estate Sector Languish; Deepening Bank-GDP Concentration Risks

Figure 5

On the other hand, despite showing signs of a slight slowdown in Q4 2024, the financial and insurance sector's contribution to national GDP continues to expand. (Figure 5, upper chart) 

It's not coincidental that the sector's improvements coincided with the BSP's unprecedented sector rescue in 2020. Since then, the sector's growth has not looked back, even as the BSP raised interest rates. That is, the sector’s GDP suggests that there was no tightening at all. 

In Q4, banks accounted for 49% of the sector's GDP, while non-banks and insurance had respective shares of 32% and 13.33%. These sectors posted GDP growth rates of 8%, 8.4%, and 8.2%, respectively. 

Yet the paradox lies in the sector's dependence on the real economy, as it lends and invests to generate profits and contribute value to GDP. 

Real estate, trade (primarily retail), and manufacturing are among their largest borrowers, accounting for 40% of total bank lending as of last November. 

Lending to the financial sector itself accounted for a 7.7% share, which together with the aforementioned sectors, totals 48.5% of all bank loans (from universal commercial, thrift, and rural banks). 

Incidentally, these sectors are also significant contributors to the GDP, making up a 42.7% share of the national GDP. Including the financial sector, the aggregate GDP increases to 52.5%. 

Aside from retail, the manufacturing sector posted a real GDP growth of 3.1%, while real estate GDP materially slowed to 3.0%, pulling its share of the national GDP to an all-time low! (Figure 5, lower diagram) 

We previously discussed the sector's deflationary spiral, and the Q4 decline could signal further price drops in the sector. 

To illustrate the struggles of the manufacturing sector, JG Summit announced the shutdown of its Petrochem business last week, in addition to the goods export recession in Q4. 

To summarize, the Philippine GDP and bank lending exposure reveal an increasingly fragile economy heavily dependent on a few sectors, which have been buoyed by bank credit. This means that the higher the concentration risks, the greater the potential impact of an economic downturn. 

X. More Signs of Consumer Weakening: Material Slowing ‘Revenge Travel’ and Outside Dining GDP 

Another piece of evidence that consumer spending has been slowing can be found in the food and accommodation sectors' GDP. 

The authorities' response to the pandemic with economy-wide shutdowns initially pushed Food GDP into an upward spiral, while the reopening triggered a "revenge travel" GDP surge in the accommodation sector. 

However, the massive distortions caused by these radical political policies have started to unwind.

Figure 6

Accommodation GDP slowed from 12.2% in Q3 to 8.7% in Q4, while food GDP dropped from 10.1% to 4.9%. Since food accounts for a large portion (68%) of the sector, the overall GDP for the sector moderated from 10.7% to 6.1%. (Figure 6, topmost and middle charts) 

The distortions caused by pandemic policies have led many investors to believe that the 'revenge travel' trend, or the recovery streak in tourism, will continue, fueling massive investments in the sector. 

In our humble opinion, they have critically misread the market, as the growth rate of foreign tourist arrivals has substantially slowed in 2024. (Figure 6, lowest image) 

Moreover, the sector's declining GDP further highlights the weakening of domestic tourism. 

XI. Summary and Conclusion 

1 Q4 and 2024 have reinforced the secondary trendline in GDP, continuing to show a slowdown in GDP growth.

2 Dwindling consumer spending has been a critical factor driving this slowdown.

3 Importantly, capital spending growth has also been lackluster.

4 Conversely, government spending has provided crucial support to GDP, along with contributions from other ancillary sectors.

Yet, these dynamics reveal that the Philippines operates under the flawed assumption of political "free lunches" — where government spending is seen as having only a positive impact, while ignoring the negative effects of the crowding out syndrome. 

They also highlight the pitfalls of the BSP's 'trickle-down' policies, which have deepened concentration risks due to the bank-dependent financing of a few sectors. 

It’s no surprise, then, that after the initial easing by the BSP in the second half of the year — which contributed to the dismal Q4 GDP, the January 2025 PSEi 30 crash and rising bond yields, the BSP proposes to continue the same strategy, slashing rates by 50 basis points and reducing reserve requirements by 200 basis points. 

Succinctly, they are "doing the same thing and expecting different results."

____

references 

Thomas Sowell, A Glimmer of Hope August 08, 2006, realclearpolitics.com 

Q3 2024 5.2% GDP: Consumers Struggle Amid Financial Loosening, PSEi 30 Deviates from the GDP’s Trajectory

 

it is important to recognize that real GDP is an analytic concept. Despite the name, real GDP is not “real” in the sense that it can, even in principle, be observed or collected directly, in the same sense that current-dollar GDP cannot in principle be observed or collected as the sum of actual spending on final goods and services in the economy. Quantities of apples and oranges can in principle be collected, but they cannot be added to obtain the total quantity of ‘fruit’ output in the economy—Steven Landefeld and Robert P. Parker, Bureau of Economic Analysis, 1995

In this issue 

Q3 2024 5.2% GDP: Consumers Struggle Amid Financial Loosening, PSEi 30 Deviates from the GDP’s Trajectory

I. The PSEi 30 Deviated from GDP’s Trajectory

II. The Treasury Markets as a Harbinger of the Economic Slowdown

III. Lessons from the 2024 US Elections: Markets Overwhelm Surveys

IV. GDP: A Tool for Political Narrative

V. The GDP Trend Line in Context: Insights from SWS Self-Poverty and Hunger Surveys

VI. Q3’s GDP Story: Consumer Spending Rebounds on Declining Inflation and Lower Rates

VII. Consumers Struggle Amid Rising Employment and Vigorous Bank Credit Expansion

VIII. Lethargic Q3 2024 Sales of Wilcon and Robinsons Retail Challenge the Consumer Rebound Narrative

IX. Public Spending Segment of the Marcos-nomics Stimulus: Are Authorities Pulling Back?

Q3 2024 5.2% GDP: Consumers Struggle Amid Financial Loosening, PSEi 30 Deviates from the GDP’s Trajectory

Despite declining inflation rates and lower interest rates, Philippine consumers face tremendous obstacles, as shown by the 5.2% Q3 GDP growth. The PSEi 30 has mispriced the GDP's trajectory 

Reuters, November 7, 2024: The Philippine economy grew in the third quarter at its slowest annual pace in more than a year as severe weather disrupted government spending and dampened farm output, to strengthen the case for further policy easing. Gross Domestic Product (GDP) grew 5.2% in the July-September on the year, government data showed on Thursday, below a Reuters poll forecast of 5.7%, for the most tepid rise since expansion of 4.3% in the second quarter of 2023.

I. The PSEi 30 Deviated from GDP’s Trajectory 

Stock markets are often considered discounting mechanisms for future economic activity. But are they? 

The PSEi 30’s impressive 13.4% return in Q3 2024—the best since 2010—was largely based on expectations that low interest rates would stimulate economic activity. 

However, despite the BSP’s rate cut in August 2024 and the tacit Marcos-nomics stimulus, Q3 GDP fell to its lowest level since the 4.3% recorded in Q2 2023.

Figure 1

Viewed in the context of the 15% year-over-year returns at the end of last Q3, the PSEi 30 has moved in the opposite direction to the GDP. (Figure 1, topmost graph) 

Faced with this inconvenient reality, the PSEi plunged 2.32% this week, marking its third consecutive weekly decline and dipping below the 7,000 level—a 7.6% drop from the October 7th peak of 7,554.7. 

Interestingly, a local media outlet, still grappling with "Trump Derangement Syndrome," attributed this decline to Trump's electoral victory, suggesting that local stocks "price in the risks of a second Donald Trump presidency and an economic slowdown."  

If the "Trump trade" holds any truth, not only did US stocks soar to new records, but Asian equities also saw significant boosts this week. Among the region's 19 national benchmarks, 14 recorded positive returns with an average gain of 1.33%!

The exceptions were Indonesia, the Philippines, Vietnam, India, and Sri Lanka. How does this fit into the narrative of the "Trump trade"?

Moreover, it's not just the PSEi 30 that should raise our concerns. Given that the financial sector has been a market leader, the financial index also warrants close attention.

The financial index posted a remarkable 23.4% year-on-year return at the end of Q3 2024, despite a notable deceleration in the sector's GDP since its peak in Q4 2023. The sector recorded an 8.8% real GDP growth in Q3, up from 8% in Q2, but lower than the 12% and 10.3% growth in Q4 2023 and Q1 2024, respectively. Bank-led financials have been a critical source of gains, as evidenced by their increasing share of the sector's GDP, despite the 2022-2023 rate hikes. (Figure 1, middle and lowest images)

Led by banks, the financial sector is the most interconnected with the local economy.  Its health is contingent or dependent upon the activities of its non-financial counterparties.

Alternatively, the sector’s outgrowth relies on political subsidies and is subject to diminishing returns.

Yet ultimately, this should reflect on its core operational fundamentals of lending and investing.

This week, the financial index fell by 2.9%.  As previously mentioned, trading activities in the PSE have been heavily skewed toward this sector.

In essence, the divergence between the PSEi 30 and GDP illustrates the significant market dislocations caused by the allure and regime of easy money—a quest for something for nothing.

II. The Treasury Markets as a Harbinger of the Economic Slowdown

Figure 2

As we have repeatedly pointed out, the Philippine Treasury markets have long been signaling an economic slowdown. The steep slope observed in Q1 has shifted to a bearish flattening and, subsequently, an inversion of the "belly," suggesting a further deceleration in inflation and a downshift in economic activity. (Figure 2, topmost diagram) 

Experts have rarely discussed how the declining inflation reflects a downturn in demand. However, this scenario was evident across the entire Treasury curve in 2024, which explains the sharp plunge in T-bill rates and increased expectations that the BSP would cut rates. The BSP responded by implementing cuts in both August and October. 

III. Lessons from the 2024 US Elections: Markets Overwhelm Surveys

The 2024 U.S. elections provided a striking illustration of the comparative efficiency between markets and surveys. 

As pointed out above, markets are imperfect, but most of their vulnerabilities stem from underlying interventions that enhance them. However, when people place bets to prove their beliefs or convictions, they demonstrate "skin in the game""—a vested interest in success through real-world actions or "having a shared risk when taking a major decision."

In contrast, individuals can express opinions they do not genuinely believe. Numerous factors—such as assumptions, coverage, inputs, delivery, and measurement—contribute to errors in surveys. Worse still, surveys can be designed to achieve specific outcomes rather than accurately estimate reality.

Using the last week’s elections, the average betting odds from several prediction markets, led by the largest platform, Polymarket, indicated that Trump would win by a landslide going into the election. (Figure 2, lowest chart)

This was contrary to the average polls, which showed a razor-thin edge for Democratic candidate Kamala Harris.  Interestingly, similar to the 2016 elections, these polling discrepancies were exposed only after Trump’s victory. (Figure 2, middle table)

By sweeping all the battleground or swing states, Trump secured an electoral landslide winning 301 to 226 (according to The New York Times) and also became the first Republican to win the popular vote since George W. Bush in 2004.

This experience reaffirmed that markets have proven to be more reliable than surveys. And this reliability extends beyond elections to broader economic metrics, exposing vulnerabilities even in government data (such as inflation, labor statistics, and GDP).

Although designed to be objective and systematic—where hard and verifiable transactional records form part of the government’s comprehensive data—a significant portion still relies on self-reported or opinion-based data.

These components introduce the potential for bias and inaccuracies.

More importantly, as a political institution, government data is not only susceptible to errors but can also be engineered to advance the agenda of the incumbent government.

One way to countercheck the reliability of these data points is through the logic of entwined data—the idea that when multiple, independent data sets or sources are connected, discrepancies or patterns can be identified. By cross-referencing market data, surveys, and government statistics, we can better assess the accuracy of any single dataset. The entwinement of data from diverse sources can serve as a powerful validation tool, especially when inconsistencies or contradictions emerge. 

Thus, comprehensiveness, large scale, and systematic nature of government data collection do not make it foolproof from errors caused by either interventions or design. 

IV. GDP: A Tool for Political Narrative 

The establishment has promoted GDP as an estimation of economic well-being, but that’s only a segment of the entire spectrum.  

Unknown to the public, GDP is primarily a political tool.

In the 1660s, William Petty conceived GDP as a means to estimate war financing during the Second Anglo-Dutch War.

Under the influence of John Maynard Keynes, it was further used to promote wartime planning during World War II, which eventually evolved into—or became the foundation of—modern macroeconomic policy (Coyle, 2014).

Simon Kuznets, a pivotal figure in the development of modern GDP, famously cautioned that "economic welfare cannot be adequately measured unless the personal distribution of income is known… The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above." (bold added) [Wikipedia, GDP]

This statement underscores the limitations of GDP as a comprehensive measure of economic well-being.

In 1962, Kuznets further emphasized the need for clarity in economic growth metrics, stating: "Distinctions must be kept in mind between quantity and quality of growth, between costs and returns, and between the short and long run. Goals for more growth should specify more growth of what and for what."

This highlights his belief that economic indicators should reflect not just output but also the broader implications of growth on society.

Applied to the current developments…

The Philippine Statistics Authority (PSA), citing the United Nations Department of Economic and Social Affairs as the source for their adaptation of the System of National Accounts (SNA), noted that "GDP is used to evaluate the overall performance of the economy and, hence, to judge the relative success or failure of economic policies pursued by governments." (bold added) [unstats, 2009]

The embedded assumption is that a factory GDP—or a top-down model—drives the economy.

But if that’s the case, then some questions arise: 

-Why doesn’t the Soviet Union still exist? 

-Why do black markets or informal economies emerge or thrive in heavily regulated economies? 

-Does the government dictate to Jollibee or SM who they should sell to? 

Yet, aside from gaining popular approval for election purposes, the contemporaneous implicit goal of GDP growth could be related to ease of accessing public savings to fund government expenditures.

V. The GDP Trend Line in Context: Insights from SWS Self-Poverty and Hunger Surveys

Still, there are many ways to "skin"—or analyze—the GDP "cat."

Although GDP is presented as a year-over-year (YoY) change predicated on a base effect, a very significant but largely ignored fact is its trendline. 

Figure 3

Fundamentally, despite all the media and establishment cheerleading—particularly with the emphasis on achieving an upper-middle-income economy—both nominal and real GDP have been performing below their pre-pandemic trendlines. (Figure 3, topmost diagram)

Worse, the Q3 GDP growth of 5.2% is sitting precariously on the support level of a subsidiary trendline, suggesting it may be testing this support. What happens if it breaks?

Additionally, what about the recent SWS Q3 2024 surveys exhibiting self-poverty ratings at 2008 highs, and hunger incidence reaching its second highest level since September 2020, during the pandemic recession? (see our previous discussion here)

Has the SWS survey been validated?

As a side note, the left-leaning OCTA Research group's Q3 survey results were starkly different from those of the SWS.

Have the authorities made a partial concession to the SWS findings by revising down the GDP growth estimates?

As a reminder, polls or surveys—whether conducted by the private sector or the government—are opinion-based or self-reported data and are inherently prone to errors. 

VI. Q3’s GDP Story: Consumer Spending Rebounds on Declining Inflation and Lower Rates 

GDP is not just about the numbers; it has been crafted to tell a story. 

Essentially, it follows the mainstream’s logic: slowing inflation and lower interest rates would boost consumption and, consequently, GDP. 

Well, that is how the Q3 5.2% GDP played out.  

From the expenditure side of GDP, real household consumption increased from 4.7% in Q2 to 5.1% in Q3, thereby boosting its share from 67.7% to 72.8%. (Figure 3, middle image) 

In contrast, government spending on GDP dropped significantly, from 11.9% in Q2 to 5% in Q3, reducing its share from 17% to 14.7% during the same period. 

Meanwhile, due a slump in government activities, construction GDP growth nearly halved from 16.2% to 8.9%, diminishing its share from 19.4% to 14.1%. Government construction GDP tumbled from 21.7% to 3.7%. 

Thanks to increases in machinery, transport, and miscellaneous equipment, durable equipment GDP surged from a contraction of 4.5% in Q2 to growth of 8.1% in Q3. (Figure 3, lowest visual) 

Nevertheless, exports plummeted from 4.2% in Q2 to a shrinkage of 1% in Q3, while imports increased from 5.3% to 6.4%. The widened gap in favor of imports—net exports—contributed to the slowdown of GDP. 

This summarizes the expenditure-based GDP analysis.

VII. Consumers Struggle Amid Rising Employment and Vigorous Bank Credit Expansion

Circling back to consumers: considering that the Philippine economy has allegedly reached near-record employment levels (close to full employment), why does consumer per capita growth continue to struggle?

Figure 4 

The employment rate hit 96.3% in September, yet Q3 household per capita growth increased only slightly, from 3.8% to 4.2%—the third lowest growth rate since Q2 2021. (Figure 4, topmost window)

Additionally, what explains the consumers' ongoing challenges in light of Universal-commercial bank lending, which reached a record high in nominal terms and grew by 11.33% in Q3—the highest rate since Q4 2022? This growth was notably powered by household credit, which also surged by 23.44%, although it was down from its peak of 25.4% in Q1 2024. (Figure 4, middle graph)

On a related note, even though the money supply (M3) hit a record of Php 17.58 trillion in Q3, its growth rate of 5.4% was the lowest since Q3 2022.

Despite the crescendoing systemic leverage (public debt plus bank credit expansion), which grew by 11.4%—the highest since Q4 2024—to a record Php 27.97 trillion, why has the money supply been trending downward?

Moreover, as evidence of the redistribution effects of Bangko Sentral ng Pilipinas (BSP) policies favoring banks amidst the thrust towards financialization, various money supply metrics (M1, M2, and M3) relative to GDP remain at pre-pandemic levels in Q3 2024, despite having clawed back some gains from the 2021 milestone. (Figure 4, lowest chart)

Despite all this, the persistent challenges of consumers continue.

Yet, this raises a crucial point: the GDP appears increasingly dependent on money supply growth and credit expansion.

VIII. Lethargic Q3 2024 Sales of Wilcon and Robinsons Retail Challenge the Consumer Rebound Narrative

There’s more.

Figure 5

In the face of a slow recovery in consumption, retail GDP dropped from 5.8% in Q2 to 5.2% in Q3 2024. (Figure 5, topmost image)

Oddly, bank lending to the sector has been soaring; it was up 12% in September from 9.3% last June.

Where is the money being borrowed by the sector being spent?

Meanwhile, Household GDP figures might be inflated.

Two major retail chains operating in different sectors have reported stagnation in topline performance.

Despite expanding its stores by 12% year-over-year (YoY), the largest downstream real estate consumer chain, Wilcon Depot [PSE: WLCON], experienced a 3.35% YoY contraction in sales and a 4.35% decline quarter-over-quarter (QoQ). (Figure 5, middle graph)

The company's worsening sales conditions have partially reflected the plunge in the sector’s Consumer Price Index (CPI).

Similarly, Robinsons Retail [PSE: RRHI], one of the largest multi-format retailers, reported another lethargic topline performance. (Figure 5, lowest chart)

In Q3, the firm’s sales increased by 3.13%, primarily driven by its food segment (supermarkets and convenience stores), which grew by 4.8%, along with drug stores, which increased by 9%. 

However, three of its other five segments—including department stores, DIY, and specialty—suffered sales contractions. 

Taking into account that the sales from these two retail chains constitute a portion of nominal GDP, applying the GDP deflator would indicate a deeper decline in WLCON's sales and flat sales growth for RRHI. 

Despite the slowdown in inflation and the rapid growth in consumer bank borrowings, consumer spending has gravitated toward essentials (food and drugs) while reducing purchases of non-essentials. 

This observation lends credence to the recent Social Weather Stations (SWS) self-poverty ratings. 

So far, despite loose financial conditions, the performance of these two retail chains contradicts the notion embedded in GDP that consumers have partly opened their wallets in Q3. 

For a clearer picture of consumer health, we await the financial reports of the largest retail chain, SM, and other major goods and food retail chains. 

Imagine the potential impact of real tightening conditions on consumer spending and GDP! 

IX. Public Spending Segment of the Marcos-nomics Stimulus: Are Authorities Pulling Back? 

Recent GDP data suggests a slowdown in public spending, but a closer look reveals a different narrative. 

While overall public spending growth has declined, sectors heavily influenced by the government are seeing gains. 

Specifically, public administration and defense GDP rose from 1.8% in Q2 to 3.7% in Q3. Similarly, sectors with significant government involvement, such as education and health, reported growths from 1.9% to 2.6% and 9.4% to 11.9%, respectively. 

Despite the appearance of a slowdown, the bureaucracy and government-exposed sectors continued to show growth. 

That’s not all.

Figure 6

According to the Bureau of Treasury’s cash operations report, the Q3 expenditure-to-GDP ratio remains at a pandemic-level rate of 24%. 

Additionally, although tax revenues improved, the Q3 deficit-to-GDP increased from 5.3% to 5.7%, again reflecting pandemic-level deficits. 

It’s essential to note that the treasury data and the Philippine Statistics Authority (PSA) GDP figures—which include their calculation of public spending—represent an apples-to-oranges comparison. 

However, we can still glean insights from a historical perspective of the Treasury’s activities. 

So, why do current data sets indicate sustained increases despite the perceived temperance in government spending? 

While authorities may embellish their deficit data, the consequences are likely to manifest elsewhere. 

Aside from the counterparties that provide financing via debt, it will manifest in the trade balance and eventually impact the private economy—via consumers: the crowding-out effect. 

Q3 Public debt stands at 61.3% of the sum of the last 4 quarters (Q4 2023 to Q3 2024) 

Thus, it’s not surprising that Q3’s fiscal deficit coincided with a notable spike in the trade deficit, which ranks as the fourth highest on record. 

The existence of "twin deficits" points to excessive spending and reveals a historic savings-investment gap that necessitates record borrowing through debt issuance and central bank interventions. 

Adding to this context, the massive RRR cut and BSP’s second round cut of 25 basis points all took effect this October or in the fourth quarter.

We can also expect the government to aim to accomplish its end-of-year spending targets in December, adding to this period’s fiscal activity.

This implies that the full impact of the 2024 "Marcos-nomics" stimulus implemented in Q4 could result in a short-term GDP boost but at a substantial cost to the private sector economy. 

___

references

Steven Landefeld and Robert P. Parker, Preview of the Comprehensive Revision of the National Income and Product Accounts: BEA’s New Featured Measures of Output and Prices, Bureau of Economic Analysis, 1995

Diana Coyle, Warfare and the Invention of GDP, the Globalist, April 6, 2014 

Wikipedia, Gross Domestic Product, Limitations at introduction 

United Nations Department of Economic and Social Affairs, System of National Accounts 2008, 2009, p. 4-5 https://unstats.un.org/