Philippines December 2024 CPI: A Possible Turning Point for the Third Wave of the Current Inflation Cycle?

 

The second mischief is that those engaged in futile and hopeless attempts to fight the inevitable consequences of inflation — the rise in prices — are disguising their endeavors as a fight against inflation. While merely fighting symptoms, they pretend to fight the root causes of the evil. Because they do not comprehend the causal relation between the increase in the quantity of money on the one hand and the rise in prices on the other, they practically make things worse—Ludwig von Mises 

In this issue

Philippines December 2024 CPI: A Possible Turning Point for the Third Wave of the Current Inflation Cycle?

I. A Closer Look at the Flawed Foundations of the CPI

II. Does December’s CPI Mark the Turning Point for the Third Wave of the Current Inflation Cycle?

III. A Brief Look at Inflation Era 1.0; Key Questions

IV. Divergent Sentiments: Government Data vs. SWS 21-Year High in Self-Rated Poverty

V. Demand Side Inflation: Record 11-Month Public Spending 

VI. More Demand Side Inflation: BSP’s Easing Cycle Designed to Rescue the Struggling Real Estate Sector and the Banking System

VII. Demand-Side Inflation: The Impact of the USD-PHP Soft Peg and Rising US Treasury Bond Yields

VIII. Conclusion: Strengthening Signs of an Emergent Third Inflation Wave

Philippines December 2024 CPI: A Possible Turning Point for the Third Wave of the Current Inflation Cycle?

A sharp increase in liquidity conditions last November, driven by BSP measures and bank activities, has likely spilled over into prices. Could December’s CPI signal the start of a third wave in the current inflation cycle?

I. A Closer Look at the Flawed Foundations of the CPI

Before we proceed with our exegesis of the Philippine Consumer Price Index (CPI) from last December, it is essential to clarify our position, which diverges from the mainstream acceptance of the inflation benchmark.

We argue that the CPI is structurally flawed for the following reasons:

1. Subjective Nature of Personal Utilities

Because people engage in exchanges to improve their well-being, prices reflect the subjective evaluations of individual economic participants.

As such, comparing personal utilities is inherently impossible because they are subjectively determined, depending on the specific circumstances of an individual, including their operating environment, preferences, values, and hierarchy of needs.

As we explained in 2022 (bold original):

Yet, the thing is, the most substantial argument against the CPI comes from its essence: it is impossible to quantify or average the spending activities of individuals. Everyone has different 'inflation.' The consumption basket varies from one individual to another. And the composition of an individual's consumption basket is never static or constant because it is subjectively determined; it is dynamic or consistently changes. 

Therefore, because the assumption used to generate an estimated CPI is fallacious, the CPI is structurally flawed. (Prudent Investor 2022) 

2. CPI as a Political Statistic 

The CPI is not merely an economic measure; it is, arguably, the most significant political statistic.  

From the Philippine Statistics Authority (FAQ): CPI allows individuals, businesses, and policymakers to understand inflation trends, make economic decisions, and adjust financial plans accordingly. The CPI is also used to adjust other economic series for price changes. For example, CPI components are used as deflators for most personal consumption expenditures in the calculation of the gross domestic product.  Moreover, it serves as a basis to adjust the wages in labor management contracts, as well as pensions and retirement benefits. Increases in wages through collective bargaining agreements use the CPI as one of their bases.

In this context, the political objectives of the administration may influence the calculation of economic indicators, rather than reflecting actual estimates. 

For example, the Consumer Price Index (CPI) plays a significant role in determining bond market rates and interest rates. By understating the CPI, the government can effectively engage in "financial repression," which entails the implicit and artificial lowering of interest rates to subsidize government debt.  

Moreover, beyond facilitating government borrowing, an artificially suppressed CPI also inflates GDP figures, creating a perception of stronger economic performance. 

The periodic (six-year) base year adjustments used for calculating the CPI—intended to reflect the most current composition of goods and services—are inherently biased toward reducing inflation rates. Consequently, CPI figures would likely be higher if calculated using the previous base year of 2006 compared to the current base year of 2018. 

3. The CPI Data and Official Narrative on Inflation 

CPI data and the official narrative often portray inflation as an inherently supply-side-driven phenomenon. 

The sectoral composition of the CPI baskets appears biased, fostering the perception that price increases (inflation) are predominantly caused by supply-side factors. This perspective is consistently reinforced by official explanations, which highlight supply disruptions as the primary drivers of inflation. 

Ironically, however, the Bangko Sentral ng Pilipinas (BSP)’s policy responses have been predominantly demand-side in nature. These responses include interest rate adjustments, reserve requirement ratio (RRR) changes, and regulatory relief measures such as the credit card interest rate cap, as well as quantitative easing or liquidity injections. On rare occasions, political interventions, like the Rice Tariffication Law, address supply-side issues directly. 

In reality, if prices were allowed to function freely, supply-side imbalances would typically resolve themselves in the short term. 

Moreover, with a fixed money supply, an increase in demand for specific goods or services, leading to higher prices, would naturally result in reduced demand for other goods or services, causing their prices to decline. This dynamic reflects changes in relative prices (increases and decreases), which do not equate to a general rise in overall price levels. For example, households operating within fixed budgets and without access to credit exemplify this principle. 

However, when prices for most goods and services rise simultaneously, it indicates a condition of "too much money chasing too few goods." In other words, a generalized price increase arises when the growth of money supply (via credit expansion) outpaces the growth in goods and services. 

In the immortal words of Nobel Laureate Milton Friedman in an interview: (bold mine) 

It [Inflation] is always and everywhere, a monetary phenomenon. It's always and everywhere, a result of too much money, of a more rapid increase in the quantity of money than an output…

If you listen to people in Washington and talk, they will tell you that inflation is produced by greedy businessmen or it's produced by grasping unions or it's produced by spendthrift consumers, or maybe, it's those terrible Arab Sheikhs who are producing it. Now, of course, businessmen are greedy. Who of us isn't? Trade unions are grasping. Who of us isn't? And there's no doubt that the consumer is a spendthrift. At least every man knows that about his wife. 

But none of them produce inflation for the very simple reason that neither the businessman, nor the trade union, nor the housewife has a printing press in their basement on which they can turn out those green pieces of paper we call money. (Friedman, Heritage Foundation)

This underscores the reality that inflation is driven by excessive monetary expansion rather than purely supply-side factors.

Figure 1

Aside from this author, has anyone pointed out the deepening reliance of GDP on money supply growth? (Figure 1, topmost graph)

4. The CPI as a Tool for Narrative Control

The BSP and the government’s approach to inflation management often involves shaping public perception through strategic "narrative control." A clear example of this is the establishment’s "pin-the-tail-on-the-donkey" CPI forecasting exercise:

-At the close of each month, the BSP releases a forecast range for the monthly inflation rate, usually spanning a margin of approximately 80 basis points.

-"Establishment experts" then publish their single-point predictions, which the media aggregates into a "median estimate."

-When the Philippine Statistics Authority (PSA) announces the official inflation rate, it almost always falls within the BSP’s forecast range—except during anomalous periods, such as the CPI spikes in 2022-2023.

This practice reinforces the establishment narrative and helps frame the public’s understanding of inflation within a constrained Overton Window, limiting alternative interpretations of its causes and dynamics.

As I elaborated in 2024 (bold and italics original): 

In essence, they blame the supply side for inflation, but use demand-side instruments to manage it. This disconnect is often lost on the lay public, who are unfamiliar with the technical details surrounding the mechanics of inflation. 

The general idea is that distortions from the supply side are seen as representing market failure, namely greed, and that the BSP is considered immaculate, foolproof, and practices Bentham's utilitarianism (for the greater good) when it comes to its demand-side policies. Therefore, it would be easier to sell more interventions when the authorities are perceived as saints.  

Ironically, the BSP has been advocating for the "trickle-down theory" in its policies: subsidize demand while controlling or restricting supply (Kling,2016) 

More importantly, the public is unaware of the entrenched "principal agent syndrome" in action: the BSP regulates these mainstream institutions. As such, the BSP indirectly controls the narratives or dissemination of information on inflation.   

Make no mistake: the structural flaws of the CPI arise not only from a critical economic perspective but, more significantly, from a political dimension designed to shift the blame for price instability onto the market economy.  

II. Does December’s CPI Mark the Turning Point for the Third Wave of the Current Inflation Cycle?

Our dialectic of the CPI’s critical flaws serves as the foundation for examining December’s CPI data. 

Let us explore the issue from the perspective of the mainstream viewpoint.

Reuters, January 7: Philippine annual inflation quickened for a third straight month in December due to the faster pace of increases in food and utility costs, the statistics agency said on Tuesday. The consumer price index (CPI) rose 2.9% in December, higher than the 2.6% forecast in a Reuters poll, and was above the previous month's 2.5% rate. December's inflation print brought average inflation in 2024 to 3.2%, well within the central bank's 2%-4% target for the year, marking the first time since 2021 that the Philippines has achieved its inflation goal. 

Though December marked the third consecutive monthly YoY increase, boosting the month-on-month (MoM) change, the upward momentum has not been strong enough to signal a decisive breakout from its year-on-year (YoY) downtrend. (Figure 1, middle image) 

Typically, a MoM rate exceeding 1% is required to achieve this. 

However, while food prices continue to play a significant role in driving up the headline CPI, their influence has been diminishing. This shift indicates broader sectoral contributions, primarily driven by housing, utilities, and transport in December. (Figure 1, lowest diagram)

Figure 2

The uptrend has been most pronounced in the transport sector, while momentum in housing and utilities has recently gained strength. (Figure 2, topmost chart)

The broadening increase in prices has also led to an expansion in the non-food and energy CORE CPI. Both the CORE and headline CPI appear to have made a turn reminiscent of patterns seen in 2015 and 2022. (Figure 2, middle pane) 

If this momentum persists, the headline CPI may be transitioning into the third wave of the current inflation cycle, which has now entered its tenth year.

III. A Brief Look at Inflation Era 1.0; Key Questions

Should the third wave, characterized by the current series of increases, be confirmed, the headline CPI is likely to surpass its 2022 high of 8.7%. 

This inflation cycle is not an anomaly; it mirrors historical precedent, specifically the secular inflation era (1.0), which spanned three inflation cycles from 1958 to 1986. (Figure 2, lowest graph) 

This brings us to several critical questions:

>How do supply-side (cost-push) factors contribute to driving an inflation cycle or even a prolonged era of inflation?

>Does the current inflation cycle mark the beginning of an "Inflation Era 2.0"?

>Which mainstream experts have anticipated and explained this phenomenon?

IV. Divergent Sentiments: Government Data vs. SWS 21-Year High in Self-Rated Poverty

A striking contrast exists between the government's data on the bottom 30% of income earners and the Social Weather Stations (SWS) self-rated poverty survey.

Figure 3

The Consumer Price Index (CPI) for the bottom 30% income group presents one of the most fascinating – and somewhat contradictory – data points in CPI coverage. (Figure 3, topmost window) 

It indicates that the food CPI for this income group has decreased at a faster rate than the overall headline CPI, resulting in a negative spread for the first time since at least 2022. This suggests that the bottom 30% has benefited from easing food inflation, ostensibly leading to ‘reduced inequality.’ 

This assumption appears to be based on the notion that stores have provided price discounts to this income group or that conditions have improved due to assistance from food banks. 

Conversely, a private poll reported that instances of self-rated poverty surged to their highest level since 2003, reaching a 21-year high! 

SWS Report, January 8 2025: The December 2024 percentage of Self-Rated Poor families of 63% was 4 points up from 59% in September 2024, rising steadily for the third consecutive quarter since the significant 12-point rise from 46% in March 2024 to 58% in June 2024. This was the highest percentage of Self-Rated Poor families in 21 years, since 64% in November 2003. (Figure 3, middle visual) 

If this poll is accurate, it implies that a vast majority of households continue to suffer from the erosion of the peso’s purchasing power. 

The recent decline in the CPI rate, far from indicating relief, might instead signify a “boiling frog syndrome”—a slow, almost imperceptible build-up of economic hardship. This is evidenced by deteriorating consumption patterns and increasing pessimism, despite near-record employment rates. 

In November 2024, employment rates reached their third-highest level, continuing a trend of near-full employment since Q4 2023. (Figure 3, lowest chart) 

Still, despite this robust employment dynamic, inflation has continued to decline. 

Does this mismatch between self-rated poverty levels and employment gains highlight productivity improvements that are not reflected in wage and income growth?  

Alternatively, could this gap reflect potential manipulation or "padding" of labor data for political purposes ahead of upcoming elections? 

As I noted back in October 2024: (bold and italics original) 

All these factors point to the SWS Q3 data indicating an increase in self-rated poverty, which not only highlights the decline in living standards for a significant majority of families but also emphasizes the widening gap between the haves and the have-nots.  

As a caveat, survey-based statistics are vulnerable to errors and biases; the SWS is no exception. 

Though the proclivity to massage data for political goals is higher for the government, we can’t discount its influence on private sector pollsters either. 

In any case, we suspect that a phone call from the office of the political higher-ups may compel conflicting surveys to align as one. 

Apparently, that phone call to influence the self-rated poverty survey has yet to occur. 

Furthermore, the multi-year high in self-rated poverty could also be symptomatic of government policies involving "financial repression" or an "inflation tax," which redistributes finances and resources from the private sector to the government to subsidize its political spending.

This raises an important question: Whose sentiment truly reflects the public's conditions?  

On one hand, government data suggests a vague improvement for low-income households due to easing food prices.  On the other hand, SWS data indicates a historic rise in self-rated poverty.  

The divergence between these two perspectives underscores the complex economic realities faced by different segments of society as they confront inflation.

V. Demand Side Inflation: Record 11-Month Public Spending

Let us now shift our focus to the demand side of the inflation cycle.

Figure 4

The first and most significant demand-side driver of inflation cycles is public debt-fueled deficit spending. (Figure 4, topmost image)

Thanks to robust tax collections, the 11-month fiscal deficit has fallen to its lowest level since 2020, despite reaching a historic high in public spending over the same period. 

However, while current tax revenues have supported fiscal health, they are subject to the variability of economic conditions and the efficiency of tax administration, whereas government spending is determined by Congressional appropriations. 

Still, diminishing returns and the crowding-out effect could slow GDP growth—or even trigger a recession—leading to reduced tax revenues. This could drive deficits back to record-high levels. 

In any case, public spending at an all-time high inevitably fosters heightened competition with the private sector for resources and financing. This competition—the crowding out syndrome—serves political objectives but disrupts economic allocation, production, and pricing. 

The Philippine budget is set to grow by 9.7% to Php 6.326 trillion in 2025, reinforcing its long-term upward trend in public expenditures. 

Unsurprisingly, this accelerating trend in public spending has closely correlated with the first inflation cycle. 

Also, this is in seeming response to the Q3 2024 GDP slowdown and a deflationary spiral in real estate prices, 'Marcos-nomics' stimulus measures have only intensified. 

That’s in addition to the administration’s positioning for this year’s elections.

VI. More Demand Side Inflation: BSP’s Easing Cycle Designed to Rescue the Struggling Real Estate Sector and the Banking System 

Despite the CPI gradually rising, the BSP cut interest rates twice in Q4 2024, supported by a significant reduction in the bank’s reserve requirements. 

When similar measures were implemented during the pre-pandemic and pandemic phases (2018–2020), they fueled the first leg of the second wave of the inflation cycle. Is history repeating itself? (Figure 4, middle diagram)

After an 11-month plateau, the banking system’s net claims on the central government (NCoCG) surged to a record-high Php 5.31 trillion in November 2024! (Figure 4, lowest window) 

Banks may have responded to an implicit directive from the BSP, which has contributed to the growth of the money supply. 

Additionally, the BSP’s ‘easing cycle’ prompted a surge in bank lending, particularly to the struggling real estate sector and consumers.

Universal-commercial (UC) bank lending grew by 11.34% in November, driven largely by a 10.11% increase in lending to the real estate sector, which reached a record-high Php 2.57 trillion. 

Meanwhile, UC consumer bank lending (excluding real estate) jumped 23.3% to a historic Php 1.54 trillion.

Figure 5

Overall, systemic leverage—defined as UC bank loans plus public debt—expanded by 11.1%, reaching an all-time high of Php 28.44 trillion.  (Figure 5, topmost chart) 

This growth drove a sharp increase in M3 money supply, from 5.43% in October to 7.7% in November. 

Despite BSP claims of ‘restrictive’ financial conditions, growth rates of systemic leverage have been rising steadily since its trough in September 2023. 

The BSP’s easing measures in the second half of 2024 have undoubtedly contributed to this systemic expansion in leverage. 

The combination of liquidity injections through NCoCG and surging systemic leverage has also driven growth in M1 money supply, which again rose 7.7% in November—reaching levels seen in October 2023. 

If history offers any guidance, reminiscent of 2014 and 2019, the current surge in cash circulation—which accounted for 30.83% of November’s M1—has likely contributed to the broadening increase in non-food and non-energy core inflation, supporting the notion that the headline and core CPI have already bottomed out. (Figure 5, middle graph) 

Notably, M1’s influence on price pressures occurs with a time lag. This means that certain price increases, due to increased spending in sectors benefiting most from credit expansion—such as real estate and their principal lenders, the banks—eventually percolates into the broader economy. 

This clearly reflects the BSP’s implicit backstop for the real estate sector and its key counterparties—the banking system. 

VII. Demand-Side Inflation: The Impact of the USD-PHP Soft Peg and Rising US Treasury Bond Yields 

Another factor that appears to be providing a behind-the-scenes support to inflation is the BSP’s US dollar Philippine peso USDPHP exchange rate cap. 

As we previously noted,

Widening Trade Deficit: First, the cap widens the trade deficit by making imports appear cheaper and exports more expensive. An artificial ceiling exacerbates imbalances stemming from the historical credit-financed savings-investment gap. (Prudent Investor, 2024)

Although November’s trade deficit narrowed to USD 4.77 billion due to a 4.93% decline in imports and an 8.7% slump in exports, it remains within the record levels seen in 2022. (Figure 5 lowest window)

Figure 6

The risk of a sudden devaluation grows as the persistent trade deficits erode the BSP's ability to defend the USDPHP ceiling magnifying inflation risks. (Figure 6, topmost diagram) 

Additionally, the recent shift in the Philippine treasury yield curve—from a flattening, belly-inverted slope to a steepening curve driven by surging bond rates—has further underscored this vulnerability. (Figure 6, middle image) 

Besides, rising yields on US Treasury bonds could influence upward pressure on Philippine rates. (Figure 6, lowest chart) 

US inflation can indirectly impact the Philippines through global trade, commodity prices, and capital flows.  For example, rising US inflation may lead to higher prices for imported goods, thus contributing to increased inflation domestically in the Philippines. 

Additionally, US Treasury yields act as a global benchmark for interest rates. When US yields rise, typically due to higher inflation expectations or tightening monetary policy by the Federal Reserve, it can exert upward pressure on bond yields in other countries, including the Philippines. 

This dynamic occurs as foreign investors may seek higher returns, which in turn can push up domestic yields. The influence of rising US bond rates on Philippine yields underscores the interconnectedness of global financial markets and reflects the broader impact of US economic conditions on emerging market economies. 

Furthermore, if the BSP insists on continuing its ‘easing cycle’ under such conditions, it risks stoking the embers of inflation, which could further weaken the USD-Philippine peso exchange rate. 

Sure, while it’s true that the structural economic conditions of the Inflation Era 1.0 differ from today’s—marked by advances in technology, globalization, and other factors—the political landscape remains strikingly similar. Authorities are still using leverage both directly (through deficit spending) and indirectly (through asset bubbles) to extract resources from the private sector. As such, the outcome—an Inflation Era 2.0—seems increasingly likely to echo its predecessor. 

VIII. Conclusion: Strengthening Signs of an Emergent Third Inflation Wave 

To wrap things up, December’s CPI has shown signs of a potential bottom and has laid the groundwork for the third upside wave of this inflation cycle. 

Aside from the turnaround in the CORE CPI, which indicates a broadening of price increases across the economy, the record quantitative easing by banks in support of record public spending and all-time highs in public debt have injected substantial liquidity into the system. 

This, combined with the accelerating growth in bank lending, has intensified liquidity growth. As a result, this increased liquidity tends to diffuse into the economy with a time lag, eventually leading to higher prices.

___

References: 

Prudent Investor, The President and the Markets "Disagree" on the CPI; Global Financial Crisis Icebreaker: The Collapse of Sri Lanka July 11, 2022

Philippine Statistics Authority Consumer Price Index and the Inflation Rate, Frequently Asked Questions 

Milton Friedman, The Real Story Behind Inflation, The Heritage Foundation 

Prudent Investor, Has the May 3.9% CPI Peaked? Are Filipinos Really Spending More On Non-Essentials? Credit Card and Salary Loan NPLs Surged in Q1 2024! June 10 2024  

Prudent Investor, Has the Philippine Government Won Its Battle Against Inflation? SWS Self-Poverty Survey Disagrees, Unveiling Its Hidden Messages October 13, 2024  

Prudent Investor, How the BSP's Soft Peg will Contribute to the Weakening of the US Dollar-Philippine Peso Exchange Rate, January 2, 2025

 

"Shocking" Philippine Q2 GDP 4.3%: Don’t Fight the Trend! Public Spending Soared in Pesos! Consumers Slowdown as Big Government Becomes "Bigger"

A ‘sound’ banker, alas, is not one who sees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him―John Maynard Keynes 

 

In this issue 

"Shocking" Philippine Q2 GDP 4.3%: Don’t Fight the Trend! Public Spending Soared in Pesos! Consumers Slowdown as Big Government Becomes "Bigger" 

I. The "Shocking" Q2 GDP 4.3% Affirmed Our Growth Path Projections 

II. 7 Reasons Behind the "Pin the Tail on The Donkey" Economics Prediction Fiasco 

III. Lessons from the Nominal and Real GDP Trendlines: Don’t Fight the Trend! 

IV. Q2 4.3% GDP: Broad-based Slowdown, Goods Export Recession and Mounting Stagflation 

V. Obscured by Base Effects, Public Spending Peso GDP Hit Second Highest Level in Q2 2023! 

VI. Slow Spending Caused the Q2 GDP "Shock?": Government Promises More Deficit Spending! 

VII. The Corrosive Effects of Public Spending on the GDP 

VIII. Critical: Household GDP Trend also on a Fragile Secondary Trendline; Affirmed by Top Line Financial Standings of Listed Firms  

IX. Epilogue: Let The Series Of Downgrades Begin! 

 

"Shocking" Philippine Q2 GDP 4.3%: Don’t Fight the Trend! Public Spending Soared in Pesos! Consumers Slowdown as Big Government Becomes "Bigger" 

 

The Philippine Q2 GDP slumped to 4.3% but "shock" was in the mainstream's prediction flop. Spending slowdown? Public spending GDP raced to its 2nd highest level! Trendlines affirm slower GDPs ahead.

I. The "Shocking" Q2 GDP 4.3% Affirmed Our Growth Path Projections 

 

Bloomberg, August 10: That’s below all 24 estimates in a Bloomberg survey with a median forecast for 6% growth and compares with 6.4% expansion in the first quarter. Barring the pandemic years of 2020 and 2021, the April-June annual expansion was the slowest since 2011, according to data compiled by Bloomberg. The economy fell 0.9% quarter-on-quarter, against a median estimate of 0.6% gain. 

 

Businessworld, August 11: Gross domestic product (GDP) expanded by an annual 4.3% in April to June, the slowest in over two years, the Philippine Statistics Authority (PSA) reported on Thursday. It was weaker than the 6.4% growth in the first quarter and 7.5% a year ago. It was well below the estimates of 21 economists in a BusinessWorld poll with a median forecast of 6% last week. 

 

To begin with, let us start with an excerpt from my inquiry on the 1Q 2023 GDP.   The anchor for my analysis was the peso trend levels of the nominal and headline GDP. 

 

But here is the thing.  Despite the mainstream's din over the GDP, their trendline reveals a different angle.   

 

Following the Q2 2020 plunge, the series of "high trajectory" numbers of 2022 failed to regain the primary trend of the NGDP and real GDP.  Instead, Q1 2023's GDP reinforced the secondary trendline, which indicates a slower pace of GDPs ahead.  That's even in the assumption that this trendline holds.    

 

Worst, if 2022's high-octane GDP had been a product of the "low" base effects, the same "high" base effects could provide tenuous support for the secondary trendline.   

 

In a way, the above demonstrates statistics and their supposed stories, which ironically contravene interpretations of the consensus.  (Prudent Investor May, 2023) 

 

Didn't this scenario materialize in Q2? 

 

We shall revert to this later. 

 

II. 7 Reasons Behind the "Pin the Tail on The Donkey" Economics Prediction Fiasco 

 

Next, the "shock!"  

 

No, not the GDP, but the consensus estimates.  

 

Not only did any expert hit the mark, but the numbers provided signified a constellation away from the official figures. 

Figure 1  

A journalist tweeted it was “one of the biggest misses on record.” With no recession and crisis on the immediate horizon, that was an understatement. (Figure 1, topmost graph) 

 

Why? 

 

First, this episode shows the problem with “pin the tail on the donkey” estimates. Fundamentally, the expert polls on GDP (or CPI) represent a “guess on a guess.”  

 

The computation of the GDP & CPI estimates involves a network of political agencies that conducts surveys to produce inputs, which then are distilled into and calculated by econometric models constructed from diverse assumptions that churn out the politically sensitive figures. 

 

Unable to mimic the comprehensive network of agencies, the consensus experts provide—not a guess on the economy—but rather a “guess” on the official numbers.  

 

As such, the numerical guesses by the mainstream experts published in polls have been moored on the output or “guess” of authorities that are announced as official numbers.   

 

For example, the BSP releases its forecast on the CPI at the end of the month or a week before the announcement. Not only that, it provides a range for its projection. The BSP’s CPI estimates ranged from 4.1% to 4.8% last July.  Yet, the BSP has the luxury of coordinating with the Philippine Statistical Authorities (PSA) to obtain preliminary numbers, so in most instances, they capture the CPI precisely. 

 

That’s a privilege unavailable to the institutions of the private sector. 

 

In gist, the “pin the tail on the donkey” discourse gives “legitimacy” to the GDP (or the CPI). 

 

That’s all it is. 

 

Second, "Pin the tail on the donkey" operates on the premise of normal distribution, which is the reason the consensus gets it right only when the numbers fall (usually) within this ambit. They miss when statistical "tails" emerge, like the 2020 recession and the Great Financial Crisis (2007-2008) or Q2 2023.  

 

As an aside, the biggest flop was during the onset of the pandemic in 1Q 2020. That was when the consensus initially denied the recession. Well, that was until it became apparent.   

 

But, against that crowd, we rightly said that a recession was in the offing, "Because the war on people translates to the disruption to the global division of labor, shocks to the demand and supply chains will occur."  (Prudent Investor, February 2020) [bold original] 

 

Please don't forget the present inflation crisis represents the other crucial predicting fiasco by the consensus, many of whom, until the present, stubbornly insist on its "transitory" (supply-side) nature. 

 

Third, another aspect of the monumental blunder is the principal-agent problem.  

 

The consensus is inherently there to sell services. Their economic discourses/literature are mostly grounded to limn an ambiance conducive to generating sales/revenues. That being the case, as copyrighters with economic backgrounds, they are biased or slanted towards optimism. Or, one doesn't solicit deposits by telling prospective clients that the economy is at high-risk levels! 

 

Fourth, there is the social desirability bias, which operates under the setting of the Overtone window.  Many like to blend around the circles of the political and politically connected elites for personal advancement.  In this case, it is taboo to even whisper about "bubbles" or politically sensitive current events, considered by the elites as unorthodox opinions.  

 

Fifth, ideology is a contributor to such gaffes too.  Trained and oriented to see "economics" through the prism of math and government interventions than through human actions and spontaneous orders—despite efforts by authorities to curtail it—magnifies their risk of misreading reality. 

 

The lack of skin in the game represents the sixth factor.  Ideas have consequences, which is especially important for entrepreneurs who put their faith in the mainstream for guidance.   

 

Misreading the GDP translates to possible capital consumption for investors but not the government and establishment forecasters, who instinctively will blame eternal forces for it.  It's why I'd prefer to read the actions of the reserved treasury traders (Demonstrated preference). 

 

Lastly, the prevailing view that the GDP functions in the same fashion as a factory, in which welfare developments emanate from measuring and controlling input and output, doesn't hold water.  

  

Even the developer of the GDP, Simon Kuznet, admitted, 

 

The valuable capacity of the human mind to simplify a complex situation in a compact characterization becomes dangerous when not controlled in terms of definitely stated criteria. With quantitative measurements especially, the definiteness of the result suggests, often misleadingly, a precision and simplicity in the outlines of the object measured. Measurements of national income are subject to this type of illusion and resulting abuse, especially since they deal with matters that are the center of conflict of opposing social groups where the effectiveness of an argument is often contingent upon oversimplification 

 

And…

 

All these qualifications upon estimates of national income as an index of productivity are just as important when income measurements are interpreted from the point of view of economic welfare. But in the latter case additional difficulties will be suggested to anyone who wants to penetrate below the surface of total figures and market values. Economic welfare cannot be adequately measured unless the personal distribution of income is known. And no income measurement undertakes to estimate the reverse side of income, that is, the intensity and unpleasantness of effort going into the earning of income. The welfare of a nation can, therefore, scarcely be inferred from a measurement of national income as defined above (Kuznet, 1934) 

 

Those engaged in a massive Friday dump seemed to have accurately anticipated the GDP. (Prudent Investor, August 2023)  

 

They either might have had ears on the right ground or on some of the agencies involved in its calculation.  

 

III. Lessons from the Nominal and Real GDP Trendlines: Don’t Fight the Trend! 

 

Government produces its statistics, but they pick on different aspects when explaining to the public. 

 

2Q data affirmed or validated our observation that the GDP will substantially slow, using the nominal and real trendline. (Figure 1, lower chart) 

 

Such trendlines reduce or eliminate the "noise" from the base effects.  

 

Q2 GDP reinforced the secondary pathway created by the 2020 recession.  Again, the secondary trendline translates to lower GDP ahead, despite occasional spikes.  

 

There have been attempts to get beyond the exponential line, which acts as its quasi-resistance level.  Though the spikes of Q4 2021 and Q4 2022 have pierced it, succeeding GDPs fell back to the secondary route.  

 

As an aside, sustained spikes in Q4 represent seasonal forces at work, which should protrude or breach the exponential curve.  But it is the marginal quarters that determine the trend. 

 

It was the same routine for Q2 GDP, which regressed and nestled close to its support. 

 

The clear and present danger is when further deceleration violates the 2nd pathway to the downside, which amplifies the risk of recession and intensifies the stagflation scenario. 

 

The fun part is that the consensus entertains themselves with all sorts of Panglossian scenarios, but ironically, their GDP trendline says otherwise. 

 

In a nutshell, the lesson from the GDP trendline is "Don't fight the trend!" 

 

There is another critical trendline, which we will discuss below. 

 

IV. Q2 4.3% GDP: Broad-based Slowdown, Goods Export Recession and Mounting Stagflation 

 

In the meantime, seen from the expenditure perspective, it was a broad downturn for the Q2 GDP.  

 

Figure 2  

 

Except for exports, which grew by 4.1% in Q2, an improvement from Q1's .1%, all other aspects were down from the previous quarter. (Figure 2, top and second to the highest charts) 

 

Household consumption slowed by 90 bps from 6.4% in Q1 to 5.5% in Q2.  Government consumption and gross capital formation GDP shrunk by 7.1% and .4, respectively.  The import GDP plunged from 4.7% in Q1 to .4%. 

 

And though exports GDP was positive, primarily from services, which grew by 9.6%, good exports suffered two successive quarterly contractions of 14.9% and .9%—a technical recession! (Figure 2, second to the lowest window) 

 

So, stagflation has enveloped the goods export sector.  The shedding of 4,100 workers in the Mactan Export Processing zone last July (for Q3) and this S&P Global PMI July report, "Filipino goods producers were able to pair back staffing levels for the second successive month. There were some reports of resignations as well, which also partly underpinned the latest reduction in payroll numbers," could be another testament to the rise of unemployment despite official data.   

 

Reduced output, high inflation, and lower employment rates are hallmarks of stagflation. 

 

V. Obscured by Base Effects, Public Spending Peso GDP Hit Second Highest Level in Q2 2023! 

 

Statistically, the faster decline in the Nominal/current GDP rate relative to the implied (deflator) index (-4.5%) resulted in the unexpected plunge in Q2 GDP to 4.3%. (Figure 2, lowest diagram) 

 

This data bolsters the general impression that a spending slowdown amidst higher prices signified its cause.  Stagflation again! 

 

But the spending slowdown reflected a phenomenon for most sectors but not public spending—which has been distorted by the base effects. 

 

Based on nominal peso trends, yes, while public spending % YoY sharply contracted in Q2, that's because its comparative base was at a record high in the same period a year ago!  

Figure 3 

 

Public spending hit its second milestone high in Q2 2023 at peso levels.  As it is, this solidified the uptrend of the share of government contribution to the GDP. (Figure 3, topmost chart) 

 

The diametric relationship between the rising share of the government spending GDP and the falling share of household consumption represents a symptom of the structural changes in the political economy, where household consumption represents an opportunity cost to the surge in public spending. (Figure 3, middle pane) 

 

The essence is that government consumption has been crowding out productive economic engagements, which has decreased productivity levels, therefore, in a slow-mo/incremental fashion, diminishing household consumption. 

 

To emphasize, such dynamics haven't been an aberration but a deepening trend.  

 

Entrepreneurs, please do take note. 

 

The delayed release of the BSP's depository survey limits our perspective on the relationship between bank credit conditions and the GDP. 

 

VI. Slow Spending Caused the Q2 GDP "Shock?": Government Promises More Deficit Spending! 

 

So what was the response by the government to the shocking Q2 GDP data? 

 

Inquirer.net, August 10: The Marcos government will accelerate spending in the coming quarters to recover the momentum following the 4.3 percent economic expansion of the country’s economy in the second quarter of this year,” said the Palace in a statement. 

Of course, as expected, take the spending measures into their hands! 

 

Behold, deficit spending could mount an incredible comeback! 

 

The historic deficit spending, financed by the BSP and banks, provided temporary "automatic stabilizers" to the GDP during the 2020 recession.  The BSP has partly funded a significant portion of deficits.  (Figure 3, lowest window)  

Figure 4 

 

The stimulative effects of record spending and historic deficits to GDP are visible on the charts. (Figure 4, top and second highest charts) 

 

But like all other policies, it has been plagued by diminishing returns.  

 

The inflationary financing of such an unprecedented scale of deficit spending, ultimately, was reflected in the headline and the core CPI, which authorities continue to blame on the supply side. (Figure 4, second to the lowest and lowest graphs) 

Figure 5 

 

Though authorities have put a brake on this, which has been slowing, it remains at emergency levels compared to the pre-pandemic era.  

 

The flawed deficit to GDP metric was 4.77% in Q2, slightly down from 4.84% in Q1. (Figure 5, topmost chart) 

 

But as the news shows, the tendency is for authorities to ramp up on it.  This response is called "path-dependent" politics. 

 

VII. The Corrosive Effects of Public Spending on the GDP 

 

The crowding out effect isn't the only corrosive force from historic deficit spending.  Worst, it functions as an invisible channel for redistribution in favor of the politically connected elites and the bureaucracy.  Yes, a reverse Robin Hood. 

 

Via the "Cantillion effect," the initial phase of monetary expansion to fund these projects flows into these groups, who can buy goods and services at this earlier phase, pushing up prices.   

 

And as money spent filters into the broader economy, price pressures spread, leaving the latter recipients bearing the brunt of inflation.  An example would be the hunger surveys of the SWS.  

 

Yes, this applies to the stock market too, e.g., with BSP's unparalleled Php 2.3 trillion injections, the PSEi rallied 56% from March 2020 crash lows to the highs of December 2020, benefiting bank stocks, the primary beneficiary of the bailout.   

 

The BSP bailout of banks in 2020 has accelerated its share of GDP, representing the "financialization" of the economy. (Figure 5, middle diagram) 

Aside from the BSP, the biggest financiers of the government have been the banking and non-bank financial industry!  

 

Yet such redistribution penalizes enterprises with little or no political connections, SMEs, and general consumers.  

 

But it is a boom for the government and their affiliates or political enterprises. 

 

Further, in theory, expectations of substantial increases in deficit spending prompt the consumer to save. 

 

Improved modeling on the effects of fiscal multipliers shows that firm and household decisions to spend, produce, and invest are largely influenced by their expectations of the future. If households anticipate that increased government spending and resulting deficits will be financed by higher future taxation, then they will consume less, not more. Reviewing a survey of this new literature, the Federal Reserve Bank of San Francisco found that "in contrast to theoretical predictions from the simple Keynesian framework, the analyses found that government spending had less bang for the buck than tax cuts. For instance, one year after the increase in spending, the impact on the level of real GDP is less than one-for-one, partly reflecting a decline in investment." (de Rugy & Salmon, August 2023) 

 

But in the current setting, consumers have been confronting inflation with a build-up of their balance sheets.  They've been borrowing from banks like drunken sailors! 

 

Unfortunately, for mysterious reasons, it's been a two-week delay in the publication of the BSP's depository surveys, showing bank lending distribution of June.  So this limits our perspective of how consumers utilized banks to adapt to (and contribute to) inflation. 

 

Finally, it is not just about redistribution, but credit monetary-financed deficit spending represents an implicit debt default. 

 

The resulting inflation lowers the ''real'' value of the remaining debt, so that although bond-holders receive the dollars promised on the face of the bond, the dollars do not command the resources they commanded at the time the bond was purchased. In effect, though no one has to come right out and say so, the Government has defaulted on part of its debt. (Lucas, 1981) 

 

So there you have it.  The promise and likely move to amplify deficit spending should lead to higher inflation, wealth, income, and political inequality, reduced consumption, and implicit debt default via financial repression or the inflation tax.  Further, it should magnify the age of inflation 2.0. 

 

These unintended consequences will induce a lower GDP that should strengthen the secondary GDP trendlines at the risk of their downside violation.  

 

VIII. Critical: Household GDP Trend also on a Fragile Secondary Trendline; Affirmed by Top Line Financial Standings of Listed Firms  

 

Aside from the GDP trendlines, the second most critical trend is the Household Consumption per capita trendline, which of course, as the primary contributor, mirrors the GDP per capita. (Figure 5, lowest chart) 

 

That said, because the GDP drifts at the secondary path, so have consumers. 

 

And as time goes by, validated by the trendline, the attenuation of the power of consumers will reflect on the general economy, such as in the retail and real estate industry. 

 

The sliding share of the retail GDP has followed the household consumption GDP. (Figure 6, topmost chart)  

 

Figure 6 

 

It is then not a surprise that sales of SM Retail flowed in congruence with nominal household spending GDP. (Figure 6, middle window)  

 

SM retail sales growth nearly halved from 16% in Q1 to 8.23% in Q2, while nominal Household GDP slipped from 14.7% to 11.6%. 

 

Diminishing returns have been taking hold. 

 

In this plane, the slowdown of consumers should also reflect in the real estate industry, which provides the venues for the retail trade and housing requirements—aside from office, tourism, and industry property requirements.   

 

The total revenues of the top 4 developers—SM Prime, Ayala Land, Megaworld, and Robinsons Land—have dovetailed with the slowing Real Estate GDP. (Figure 6, lowest window)   

 

Nominal Real Estate GDP slipped from 10.5% in Q1 to 9.1% in Q2, while aggregate revenue growth crashed from 23.9% to 7.5% over the same period. 

 

The micro and macro perspectives provided by the GDP and Financial standings of listed companies share the same narratives: reduced power for the much-ballyhooed consumption-led GDP as the big government becomes "bigger." 

 

IX. Epilogue: Let The Series Of Downgrades Begin! 

 

ABS-CBN News August 11: A subsidiary of Fitch Solutions on Friday said it is slashing its growth outlook for the Philippines. BMI revised its full year growth forecast for the Philippines to 5.3 percent after the gross domestic product expanded by 4.3 percent in the second quarter of 2023, below its expectations. Consensus estimate for Philippine economic growth for the second quarter was 6 percent.  

 

Because the consensus has predicated their annual GDP forecasts from an elevated standpoint, the Q2 4.3% GDP "shock" translates to massive downside adjustments to these.  

 

The takeaway: Let the series of downgrades begin! 

 

___ 

References: 

 

Prudent Investor, The Fundamental Story Behind the 6.4% Q1 2023 Philippine GDP: Public Spending Cushioned a Slowing Consumer, May 14 2023, Substack, Blogger (Chart reference excluded) 

 

Prudent Investor, Batten Down the Hatches! Global Recession Ahead: The New Coronavirus Pushes China’s Economy to a Freefall! February 16, 2020 

 

Simon Kuznets, 1934. “National Income, 1929–1932”. 73rd US Congress, 2d session, Senate document no. 124, page 7. https://fraser.stlouisfed.org/title/971  

 

Prudent Investor, Pre-Closing "Dumps" Sent the Philippine PSEi 30 Tumbling Below the 6,500 Level August 7, 2023: Substack, Blogger 

 

Veronique de Rugy Jack Salmon The Keynesian case for open-ended government spending doesn’t square with the facts, August 10,2023 Mercatus Center 

 

Robert E. Lucas Jr. Economic Scene; Deficit Finance And Inflation, August 26, 1981, New York Times