Could the Philippine Government Implement a 'Marcosnomics' Stimulus Blending BSP Rate Cuts and Accelerated Deficit Spending?

 

Keynesianism is the destruction of the middle class. By printing money and bloating deficits and spending, the size of government in the economy rises faster than the private and productive sectors. The size of the government increases during recessions by increasing expenditure to combat them, and it also increases during economic downturns by hiking taxes and creating inflation, which is a hidden tax—Daniel Lacalle 

In this issue

Could the Philippine Government Implement a 'Marcosnomics' Stimulus Blending BSP Rate Cuts and Accelerated Deficit Spending?

I. Will the BSP Embark on the Path of Easing via Rate Cuts Starting in August? 

II. Will the BSP’s Rate Cuts Not Amplify the Balance Sheet Imbalances?  

III. Will a Slowdown in June CPI Reinforce the BSP’s 'Dovish' Position? 

IV. Public Spending Surges to Fourth-Highest Level on Record in May! 

V. Will the Government Introduce a Fiscal Stimulus Package Soon? 

VI. Aggressive Deficit Spending Expected to Increase Public Financing or Debt 

VII. "Marcosnomics" Stimulus: Expanded Spending on Pre-Election, Defense Related and Infrastructure? 

VIII. Five-Month Debt Servicing Costs Hits Record High! 

IX. "Marcosnomics" Stimulus: BSP Easing Plus Accelerated Deficit Spending; Burst of Deficit Spending to Cap Disinflation 

X. The Addiction to Government Interventions and Stimulus Magnify Systemic Risks 

Could the Philippine Government Implement a 'Marcosnomics' Stimulus Blending BSP Rate Cuts and Accelerated Deficit Spending?

With the BSP priming the public for a policy easing this August, and May public spending reaching a non-December all-time high, could this signify the implementation of a 'Marcosnomics' signature stimulus?

I. Will the BSP Embark on the Path of Easing via Rate Cuts Starting August?

Businessworld, June 28,2024: THE BANGKO SENTRAL ng Pilipinas (BSP) kept interest rates steady for a sixth straight meeting on Thursday but signaled that a rate cut at its next meeting in August is “somewhat more likely than before,” with up to 50 basis points (bps) in easing likely this year…Mr. Remolona said he expects inflation to further ease in the second semester with the implementation of lower tariffs on rice. 

If an increase in rice tariffs will lower the CPI, why would this require the BSP to cut rates?

Policy rates represent a tool for managing aggregate demand, largely ignoring the impact on balance sheets.

By signaling a cut, is the BSP admitting to a worsening slowdown in demand?

Don’t you see the contradiction? Why would the BSP use a demand management policy to address a supply-side concern? 

For the avoidance of doubt, the results of the BSP’s latest consumer survey corroborate their implicit worries (bold added): The consumer sentiment in the Philippines was more pessimistic for Q2 2024 as the overall confidence index (CI) became more negative at -20.5 percent from -10.9 percent in Q1 2024. The decline in the index is reflective of the increase in the percentage of pessimists, which outweighed the increase in the percentage of optimists. The weaker confidence among consumers was mainly due to their concerns over the: (a) faster increase in the prices of goods and higher household expenses, (b) lower income, (c) fewer available jobs, and (d) the effectiveness of government policies and programs on inflation management, traffic and public transportation, provision of financial assistance, and labor and employment.  For the next quarter (Q3 2024), the CI turned negative at -0.4 percent from 2.7 percent in Q1 2024. However, the consumer sentiment for the next 12 months (May 2024-April 2025) remained optimistic as the CI was little changed at 13.5 percent from 13.4 percent in Q1 2024. (BSP, June 2024) 

So, could this be the genuine reason for the entrenchment of the BSP’s 'dovish' stance? 

It does not stop there. 

It’s not just consumers; businesses have also shared this dour sentiment for 2024. 

This is according to another BSP survey. (bold mine): The business sentiment in the Philippines turned less upbeat in Q2 2024 as the overall confidence index (CI) declined to 32.1 percent from 33.1 percent in Q1 2024. This is reflective of the combined decrease in the percentage of optimists and the increase in the percentage of pessimists. The Q2 2024 business confidence turned less buoyant due mainly to the firms’ concerns over: (a) softer demand for goods and services such as personal care, health and other consumer products, construction supplies, city hotels and restaurants, and manpower services, (b) ongoing international conflicts that may push oil prices higher, (c) slowdown in business activity due to El Niño-induced extreme weather conditions, and (d) persistent inflationary pressures that may weigh down consumer spending. For Q3 2024, the country’s business confidence weakened as the overall CI also fell to 43.7 percent from 48.1 percent in the Q1 2024 survey result. For the next 12 months, business outlook was similarly less upbeat as the overall CI decreased to 56.5 percent from 60.8 percent in the Q1 2024 survey result (BSP, June 2024) 

Even before this survey, has the BSP been aware that the revenue growth of listed retail chains had been struggling for some time? 

Besides, why did the BSP not address the escalating tensions between the Philippine government and China over the disputed South China Sea claims? 

An outbreak of violence in the region would not only disrupt global supply chains but also raise the specter of a wider conflict—a "casus belli"—that could have severe socioeconomic and financial consequences for the Philippines. 

Does this represent another case of an analytical "blackout?" 

In a nutshell, is the BSP concerned about how the gloomy views of consumers and businesses may translate into weaker GDP growth? 

II. Will the BSP’s Rate Cuts Not Amplify the Balance Sheet Imbalances?

On the other hand, how would interest rate cuts boost demand, incomes and jobs if household and business balance sheets are already heavily leveraged?

Figure 1

Has the BSP not learned from the Bank of Japan's experience with negative nominal interest rates, where instead of stoking inflation, it exacerbated the curtailment of demand that led to its "lost decades?" (Figure 1, topmost graph)

Further, would the BSP's rate cuts not only magnify economic imbalances and stoke inflationary pressures but also widen inequality between those with access to formal credit and those reliant on shadow banking, such as small and medium enterprises (SMEs)?

Moreover, has the BSP also expressed concerns over the deteriorating conditions in the banking system, where higher interest rates have led to the erosion of accounting profits, potentially worsening financial liquidity conditions and exposing the solvency issues of bank borrowers and the industry? (Figure 1, middle and lower windows)

Will the BSP’s rate cuts not amplify the balance sheet imbalances?

III. Will a Slowdown in June CPI Reinforce the BSP’s 'Dovish' Position?

Along with the above, as previously noted, May's CPI could represent an interim peak. We arrived at this conclusion based on several factors:

Figure 2

1. Slowing month-over-month momentum in the CPI

2. A bullish flattening of the Philippine treasury yield curve, which narrowed further in June (Figure 2, topmost graph)

3. Instead of boosting demand, the elevated leverage in household balance sheets—as revealed by record consumer spending—has fueled an increase in consumer non-performing loans (NPL)

4. Deteriorating job market conditions

5. The recent bounce in imports may be driven by substitution effects due to production slack

6. The rising US dollar-Philippine peso exchange rate, which not only contributes to higher import and financing costs but also puts pressure on local industries to generate more foreign exchange revenues to fill the widening trade gap. (Prudent Investor, June 2024)

The BSP has published its projected CPI for June (3.4%-4.2%)—which seems tilted lower than May (3.7%-4.5%). The next step will be for the consensus "to pin the tail on the donkey" by selecting numbers within the BSP’s range.

If the CPI slows, would it validate our view that the economy has been slowing faster than expected? And would this justify the BSP’s proposed easing this August?

IV. Public Spending Surges to Fourth-Highest Level on Record in May!

We also noted peculiar signs of restraint in government spending in the first four months of 2024.

However, this trend may have reversed in May, as the enlarged deficit emanated from outsized government spending!

Inquirer.net, June 28, 2024: The government reverted to a fiscal deficit in May, after posting a P42.7-billion surplus in April, amid higher public spending fueled by accelerating inflation and a high-interest environment…Government spending in May amounted to P557 billion, accelerating by 22.24 percent mainly driven by allotments to government agencies’ projects and budgetary support to local government units and state-run corporations. For the first five months, disbursement reached P2.3 trillion, up by 17.65 percent…For this year, the government has set a budget deficit ceiling of P1.48 trillion, or equivalent to 5.6 percent of gross domestic product (GDP). It also aims to reduce the deficit-to-GDP ratio to 3.7 percent by 2028.

May's government spending represented the fourth largest on record, according to data from the Bureau of Treasury! (Figure 2, middle chart)

Ironically, this May spending surge was in line with the biggest spending streams that occurred in December over the last three years—when the government typically used the final month to meet or exceed (political) expenditure targets. Yet, it is not even the end of the second semester. (Figure 2, lowest image)

Or, public spending in May was the highest on record (excluding the December expenditures)!

Has the government's frontloading of expenditures last May broken the seasonal December spending cycle? 

That’s right.  The surge in May’s deficit spending may set the template for the coming months through the year-end—we can only expect December spending to surge even more (or hit a fresh milestone)! 

Because of the revenue or collection slowdown, the spending ballooned the fiscal deficit way above 2023’s level. 

V. Will the Government Introduce a Fiscal Stimulus Package Soon?

Figure 3

Remember that government revenues are dependent on economic, financial, and administrative performance, while spending is programmed as part of the Congress—approved budget. 

For instance, not only does public spending play a crucial role in shaping economic imbalances that can lead to inflation, but inflation also has a material influence on revenue collection. Revenues depend on the declared transacted price levels.  That is to say, a slowdown in private GDP growth would materially widen the fiscal deficit. (Figure 3, top and middle visuals) 

The government has already proposed a 10% increase in the 2025 budget to Php 6.35 trillion. 

A surge in public spending increases a segment of the private sector’s revenues from Public-Private Partnerships (PPP) and other direct and indirect linkages via the political bureaucracy—which will be used for "consumption." 

Therefore, as we observed in our early June post, 

Are they saying that the current weakness in consumer spending growth will reverse with more deficit spending or more implicit transfers favoring the government and its cronies? Or how will increasing this reverse the current trend?  (Prudent Investor, May 2024) 

Are authorities expecting an economic downturn? Are they preparing the public for the launch of a grand stimulus through measures via easing rates, liquidity injections, and deficit spending? 

As we concluded from the same note last May, 

Once again, when the economy slows substantially or recession risks mount, monetary authorities will likely resort to the 2020 pandemic playbook: substantially easing interest rates, infusing record amounts of liquidity, and deepening the imposition of relief measures. Alongside this, political authorities are likely to drive deficits to reach record levels. 

VI. Aggressive Deficit Spending Expected to Increase Public Financing or Debt 

The increase in the fiscal budget gap for May translates to an impending reversal in the four-month deceleration of public debt issuance. (Figure 3, lowest chart) 

Intriguingly, some quarters have praised this deceleration without fully comprehending the policy "path dependency" of the authorities. 

Subsequent to the April announcement of a Php 2.57 trillion target for 2024, which represents an 8.9% increase from last year's Php 2.07 trillion, the government has already declared that it proposes to raise Php 600 billion in Q3, following the projected Php 585 billion increase in Q2.

As of May, the Bureau of the Treasury (BoTr) has raised Php 1.038 trillion, which amounts to 40% of the projected Php 2.57 trillion financing.

The increase in the May’s fiscal budget gap translates to a coming reversal in the four-month deceleration in public debt issuance.  Intriguingly, some quarters have exalted this deceleration with hardly a comprehension of the policy path dependency of authorities. 

And subsequent to the April announcement of a Php 2.57 trillion target in 2024 or an 8.9% increase from last year’s Php 2.07 trillion, the government has already declared that it proposed to raise Php 630 billion in Q3 following the projected Php 585 billion domestic borrowings in Q2. 

Through May, the BoTr has raised Php 1.038 trillion or 40% of the projected Php 2.57 trillion financing. 

This path dependency on deficit spending would entail increases in systemic leveraging. 

VII. "Marcosnomics" Stimulus: Expanded Spending on Pre-Election, Defense Related and Infrastructure? 

How is the government deploying our anticipated 'stimulus'?

Figure 4

We anticipated a reversal from the recent slack in LGU allocations, primarily due to the upcoming 2025 Senate and local elections.

The 'proxy war' between the US-NATO alliance and the Russia-China-BRICs alliance is playing out in the domestic political sphere through an intensifying contest between the incumbent and former administrations, where LGUs will play a pivotal role in determining the winners.

The pro-China former President and his two children plan to run for Senate in 2025 against the pro-US incumbent.

Facilitated by the BSP's easing and the banking system's liquidity infusions, the incumbent administration is expected to disproportionately increase budgets for select and favored LGUs that will promote their domestic and geopolitical agendas.

Although LGU allocations increased by 8.54% in May, the 5-month growth surged by 10.6%, reaching a nominal spending of Php 420.3 billion, the second-highest on record. (Figure 4, upper graph)

Meanwhile, infrastructure, public defense-related projects, pre-election expenditures, and bureaucratic spending were likely funded by the national government, which saw a 22.3% spike in disbursements in May.

This contributed to a 14.8% surge in national government spending over the first 5 months, reaching an all-time high nominal level of Php 1.443 trillion! (Figure 4, lower image)

So if we are not mistaken, "Marcosnomics" will be heavy on political expenditures but sold to the public as a "stimulus."

VIII. Five-Month Debt Servicing Costs Hits Record High!

But there is more.

Figure 5

Notably, interest payments skyrocketed by 47.8% in May alone! (Figure 5, topmost graph)

Over the 5-month period, interest payments soared by 40% to a record high of Php 321.6 billion. As it is, the pie of interest payments rose to 14.24%—its highest level since 2009!

Consequently, 5-month debt servicing (including interest and amortization) surged by 48.5% to an unprecedented Php 1.217 trillion, accounting for 91.78% of the full-year debt servicing in 2023! (Figure 5, middle and lowest windows)

Specifically, amortizations are just 8.22% below the 2023 levels, while interest payments remain 48.8% short of last year’s level.

IX. "Marcosnomics" Stimulus: BSP Easing Plus Accelerated Deficit Spending; Burst of Deficit Spending to Cap Disinflation

Adding these together, the BSP’s incentive to ease or cut rates is largely political in nature.

Primarily, it aims to lower financing costs to support the administration’s pre-election geopolitical and GDP "stimulus," while mitigating the rising costs of public debt servicing. 

Additionally, it seeks to alleviate liquidity and solvency challenges affecting the banking industry and its clients. 

The banking system operates similarly to a cartel under the BSP's oversight.

Figure 6 

Faced with stepped-up deficit spending, the BSP could likely bankroll this by increasing its direct liquidity operations (net claims on the central government—NCoCG); a strategy previously employed in 2020. (Figure 6, topmost chart) 

In coordination with the BSP, banks are also expected to increase financing of public debt through purchases of government debt (NCoCG). (Figure 6, middle graph) 

The acceleration of the banking system’s historic NCoCG has mirrored the surge in the record-high in public debt. May’s data will be reported by BuTr in the first week of July.

Figure 7

Let's not forget that banks have also been significant borrowers of local savings to bridge gaps from deposit shortfalls, hidden non-performing loans (NPLs), substantial mark-to-market losses, and record Held-to-Maturity (HTM) assets reflected on their balance sheets.

The banking system's bonds and bills payable have been approaching the Q4 2019 zenith. (Figure 7, topmost image)

Essentially, the banking system is in tight competition with the government and non-financials for access to the public's savings. 

Not only does this put a floor on rates, but it also provides an incentive for the BSP to expand liquidity operations to keep the system afloat. Yet, this entrenches inflation, the interconnectedness of leverage, and the potential transmission of risks.

As such, while we expect the rebound in the CPI to have likely climaxed in May—largely due to growing slack in the private sector—a burst of deficit spending should put a floor under it. 

Along with this, the specter of stagflation rises.

X. The Addiction to Government Interventions and Stimulus Magnify Systemic Risks

It is no coincidence that the rise in the USD to Philippine peso exchange rate has closely correlated with public spending.

Put differently, monetary inflation in support of the “trickle-down” policies that lead to the “twin deficits” emasculates the purchasing power of the peso against the USD and gold. 

So there you have it.  The BSP’s ‘dovish’ stance is largely in consonance with the acceleration of the national government’s intensifying deficit spending. 

While intended as a GDP “stimulus,” these measures also serve other underlying political agendas—facilitating access to cheaper domestic savings for pre-election financing, geopolitical activities, other domestic political objectives, and cushioning banks from worsening balance sheet challenges. 

As the above shows, the Philippine government and the establishment have been so hooked on stimulus in the hope that it will deliver some form of utopia. 

Yet, the more the interventions, the deeper the imbalances, the greater the probability of risks. 

___

References: 

Daniel Lacalle, The U.S. fiscal nightmare. Yellen cannot expect a strong economy with higher spending and taxes, dlacalle.com May 26, 2024 

Bangko Sentral ng Pilipinas, Consumers are Pessimistic in Q2 and Q3 2024, But Optimistic for the Next 12 Months*, June 28, 2024, bsp.gov.ph 

Bangko Sentral ng Pilipinas, Businesses are Less Optimistic in Q2 2024, Q3 2024, and the Next 12 Months*, June 28, 2024, bsp.gov.ph  

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, Philippine Q1 2024 5.7% GDP: Net Exports as Key Driver, The Road to Financialization and Escalating Consumer Weakness May 12, 2024

 

Deciphering Conflicting Data: Record Philippine December Employment Rate, January 2024 CPI Plunge, and Q4 GDP’s Slowing Consumer Spending

 

Economists provide forecasts not because they know, but because they are asked to by clients or employers. The payoff structure is unusual. Forecasting’s key performance indicator is relative rather than absolute. This means an economist’s forecasts tend to cluster around a point with few if any outliers. As John Kenneth Galbraith held: “It is far, far safer to be wrong with the majority than to be right alone.”—Satyajit Das

 

In this issue:

Deciphering Conflicting Data: Record Philippine December Employment Rate, January 2024 CPI Plunge, and Q4 GDP’s Slowing Consumer Spending

I. A Goldilocks Economy? Record December Employment Rate and Plunge in January CPI; Not the Phillips Curve

II. Widening Divergence between the CPI, Treasury Market Rates and BSP Monetary Policy

III. Disinflation: Supply Side Glut?

IV. Disinflation: Slack in Demand Despite BSP’s Backdoor Easing?

V. Record Employment Rate? Why the Slowing per Capita Headline GDP and Household Consumption?

 

Deciphering Conflicting Data: Record Philippine December Employment Rate, January 2024 CPI Plunge, and Q4 GDP’s Slowing Consumer Spending

 

Is the mounting mismatch between record employment and sharp disinflation fueled by demand or supply? Q4 2023GDP provides a clue.

 

I. A Goldilocks Economy? Record December Employment Rate and Plunge in January CPI; Not the Phillips Curve

 

The Philippine Statistics Authority released two critically significant and interdependent economic data.

 

First, it reported a sharp decline in the statistical inflation rate, the CPI, last January.

 

Rappler, February 6: Prices of goods accelerated at a slower pace for the fourth straight month in January, as food prices continued to stabilize. But in a rice-loving country like the Philippines, this downtrend is not easily felt as global prices of the staple coupled with weather concerns have pushed up domestic prices. The Philippine Statistics Authority on Tuesday, February 6, reported that the inflation rate in January eased further to 2.8%, which is well within the government’s target range of 2% to 4%. The latest figure is lower than the 3.9% posted in December 2023, and the 8.7% recorded in January 2023.

 

Next, it published a record uptake in employment, or the nation registered its highest employment rate.

 

Inquirer.net, February 7: The proportion of unemployed Filipinos to total labor force sank to another record-low in the final month of 2023. There were 1.6 million jobless people in December 2023, down from 1.83 million in the preceding month, the Philippine Statistics Authority (PSA) reported Wednesday. This put the jobless rate rate to 3.1 percent, the lowest since the PSA adopted a new definition of “unemployment” back in 2005. It beat the previous record-low unemployment rate of 3.6 percent recorded in November.

 

Acolytes of the Phillips Curve, the mainstream, could see this as an anomaly. 

 

Named after economist A.W. Phillips, the Phillips Curve represents the inverse relationship between inflation and unemployment, channeled through wages.   "A falling unemployment rate signals an increase in the demand for labor, which puts upward pressure on wages. Profit-maximizing firms then raise the prices of their products in response to rising labor costs," or lower unemployment is associated with higher inflation and vice versa. (Engemann, 2020)

 

Although we are no fan of the Phillips Curve, the recent data paints the tape of a "Goldilocks economy" anchored on an explosion of productivity.

 

Really?

 

II. Widening Divergence between the CPI, Treasury Market Rates and BSP Monetary Policy

 

Figure 1

 

January's CPI has resulted in the widening deviance between the Treasury markets.  (Figure 1, topmost chart)

 

The yields of one-month T-Bills have started to climb instead of falling.   In the meantime, the BSP policy rate (ON-RRP rate) has also reached its broadest differentials with the CPI since 2019.  A series of rate cuts by the BSP followed back then. (Figure 1, middle window)

 

The steep decline in the CPI has widened its gap with the BSP rates, resonating with the 2005-2007 episode.   Will the BSP repeat its panic cuts in 2007? (Figure 1, lowest graph)

 

Figure 2

 

Further, the spread between core CPI and the headline CPI has expanded, revealing the "stickiness" of non-food and non-energy inflation. (Figure 1, topmost chart)

 

This mounting disjointedness could either mean that the BSP's "hawkishness" has influenced the Treasury markets, or the latter could be telegraphing a rebound in inflation.

 

The thing is, market price distortions could result in disorderly adjustments when the economy starts to reflect on the underlying conditions.

 

III. Disinflation: Supply Side Glut?

 

Has the current streak of disinflation emanated from the demand or supply side?

 

The mainstream has programmed the public to believe that the supply side is responsible for the latest episodes of inflation.

 

So, let us explore.

 

Manufacturing Q4 2023 "real" GDP reported a stagnant .6%, the lowest since Q1 2021.  The sector's bank borrowings and the Producer Price Index, which recently drifted into deflationary territory, have indicated such doldrums. (Figure 2, middle diagram)

 

On the other hand, the real GDP imports of goods clocked in a -2.6% in Q4 2023.

 

Capital goods imports reported a -4.6%, +.15%, and 0% growth in the last three months of 2023. (Figure 2, lowest graph)

 

If investments were down, how could the employment rate reach a record high? From local savers?

 

Meanwhile, consumer goods imports grew by 4.8%, 15.4%, and 10.6%, respectively.

 

In a nutshell, consumers have become increasingly dependent on imports, which translates to rising trade deficits.

Figure 3

 

But the PSA also tells us that based on preliminary data, domestic trade plummeted in Q4 2023.

 

Philippine Statistics Authority, February 8: The total quantity of domestic trade in the fourth quarter of 2023 was registered at 3.24 million tons. This represents an annual decrease of 48.6 percent from the 6.31 million tons recorded quantity of domestic trade in the same quarter of 2022. In the third quarter of 2023, the annual decline was reported at 6.4 percent, while in the fourth quarter of 2022, an annual increase of 12.0 percent was recorded. Almost all (99.9%) of the commodities were traded through water (coastwise), while the rest were traded through air in the fourth quarter of 2023…Domestic trade value refers to the outflow value of commodities transported from the region/province of origin to another region/province of destination. The total value of domestic trade in the fourth quarter of 2023 amounted to PhP 137.71 billion. This indicates an annual decrease of 52.4 percent from the PhP 289.57 billion value of domestic trade in the same period of 2022. (bold and italics mine)

 

The PSA doesn't say what caused the sharp dive in domestic trade.   If there had been bottlenecks in shipments and logistics, given a steady demand, prices of goods would have risen.   Last December, the CPI was 3.9% and 4.3% in Q4, down from 4.1% in November and 5.3% in Q3.

 

Briefly, there is little evidence that a supply glut has led to the recent disinflation.

 

IV. Disinflation: Slack in Demand Despite BSP’s Backdoor Easing?

 

How about demand?

 

Unlike the BSP's rate hikes in 2018, which aggravated the slowdown in general bank lending, the Universal-Commercial Bank lending portfolio continues to grow but at a subdued pace.  (Figure 3, middle graph)

 

And though lending to the production side has slowed somewhat, the record growth spike of consumer borrowings—in part from the BSP's interest rate caps and partly from responses to inflation—has partially offset this. (Figure 3, lowest chart)

Figure 4

 

Since the implementation of the subsidies, the domestic banking system's business model has shifted radically to focus on consumer spending. (Figure 4, topmost pane)

 

The CPI has closely tracked salary loans, which bounced off from its recent growth downturn. (Figure 4, middle chart)

 

And so, could the rebound in salary loans have emanated from more jobs?  Salary loans in pesos are at a record high!

 

Add to this the record liquidity injections by banks via the monetization of the government's debt. 

 

Net claims on central government (NCoCG) soared by 14.2% to a record Php 5.19 trillion last December. (Figure 4, lowest pane)

 

Also, the BSP's NCoCG spiked to Php 1.045 trillion.

Figure 5

 

As it happened, while the BSP insists on embracing a "hawkish" stance, the reality is that side policies (subsidies, relief measures, and injections) have led to a rebound in the money supply (M2 and M3) to the GDP ratio. (Figure 5, topmost diagram)

So, liquidity (credit) expands even as the BSP supposedly has been tightening. 

 

Thus, the BSP's rate hikes signify a mirage—tightening for headline consumption only.

 

Should credit growth reaccelerate, despite the high rates, this could lead to a reversal in the present course of disinflation. 

 

Have the Treasury markets been factoring stagflation—slowing growth amidst higher CPI?

 

Moreover, pulling forward consumption via increased leverage translates to lower growth and higher credit risks ahead.

V. Record Employment Rate? Why the Slowing per Capita Headline GDP and Household Consumption?

 

Here is the thing.  The Q4 and 2023 GDP data has incorporated the all-time high in employment rate or the record-low unemployment rate.

 

But, in the face of alleged tightening labor, why have per capita GDP and household consumption been slowing? (Figure 5, middle and lowest graphs)

 

See earlier discussion of the Q4’s slowing consumer here.

 

Figure 6

 

Has this been because the principal industries (trade, finance, real estate, and transport) have seen a slowdown while the job increases have emerged from agriculture, construction, information, and public defense or mostly government and government-related activities?

 

Oddly, the government reported a rebound in manufacturing last December despite the sluggish GDP.

 

If demand has been strong, why the labor retrenchment in the trade industry?

 

Deteriorating quality of labor in the face of increasing quantity?

 

Or, could either one of the data (the CPI and the employment rate) have been inaccurate? Or could both have been defective? Or could the GDP have been wayward from actual conditions? Or, have I been missing anything?

In the end, a glut in the supply seems unlikely.  Despite backdoor easing by the BSP, demand has been insufficient to boost the CPI and the GDP—even with record employment rates. 

Further, demand from unproductive and speculative activities consumes savings and capital, which, therefore, is unsustainable.

 

____

References

Kristie M. Engemann, What Is the Phillips Curve (and Why Has It Flattened)? January 14, 2020, Federal Reserve Bank of Saint Louis