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