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

  

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

In this issue

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

I. The GDP’s Critical Defects

II. The Mainstream Narrative is Failing

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

IV. Malinvestments: Retail Expands While Consumer Spending Stagnates

V. Proposed Minimum Wage Hikes to Compound Consumer Woes

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

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

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

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

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

XI. Summary and Conclusion

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

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

I. The GDP’s Critical Defects 

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

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

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

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

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

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

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

Apples and oranges, you say? Exactly.

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

II. The Mainstream Narrative is Failing 

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

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

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

What does the PSA data reveal?

Figure 1

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

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

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

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

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

Figure 2 

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

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

Incredible.

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

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

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

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

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

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

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

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

Here's an example:

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

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

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

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

The government's statistics are riddled with paradoxical figures.

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

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

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

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

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

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

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

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

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

Important questions arise: 

-Where did all that record bank credit expansion go?

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

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

In this context, government data on employment appears questionable.

IV. Malinvestments: Retail Expands While Consumer Spending Stagnates

Figure 3

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

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

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

V. Proposed Minimum Wage Hikes to Compound Consumer Woes

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

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

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

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

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

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

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

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

Incredible.

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

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

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

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

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

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

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

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

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

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

Figure 4

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

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

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

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

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

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

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

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

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

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

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

Figure 5

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Figure 6

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

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

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

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

XI. Summary and Conclusion 

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

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

3 Importantly, capital spending growth has also been lackluster.

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

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

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

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

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

____

references 

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

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

 

GDP is the most common out-of-context stat used by governments to convince the citizenry that all is well. It is yet another stat that is entirely manipulated by inflation. It is also manipulated by the way in which modern governments define "economic activity"—Brandon Smith

 

In this issue:

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

I. As Predicted, Q1 2024 5.7% GDP Retreated and Reinforced the Secondary Trendline

II. Why the GDP is Not the Economy

III. Net Exports as Key Driver of Q1 2024 GDP

IV. The Money Illusion: Net Exports Increased Due to the Peso’s Devaluation

V. Despite Record Low Unemployment Rates, Entropy in Consumers’ Spending Capacity

VI. Weakening Consumers: Aggressive Consumer Borrowing and Drawdown in Savings

VII. Consumer Entropy: The Lagged Crowding Out Effects of Fiscal Deficit Spending

VIII. Export Boom? Manufacturing Bounced in Q1 2024, But Finance Industry Dominated the Field

IX. Q1 2024 Outperformance Led by Construction, Accommodation and Service Sectors

X. Trade and Real Estate Malinvestments: Supply Side Expands even as Demand Sputters

XI. Summary and Conclusion

 

Philippine Q1 2024 5.7% GDP: Net Exports as Key Driver, The Road to Financialization

The 5.7% GDP growth in Q1 2024 highlights net exports as the primary driver, alongside the trend toward financialization and a significant deceleration in consumer spending.

 

I. As Predicted, Q1 2024 5.7% GDP Retreated and Reinforced the Secondary Trendline

 

Reuters, May 9, 2024: The Philippine economy accelerated less than expected in the first quarter as weaker consumer spending restrained growth, reinforcing expectations that the central bank will leave interest rates unchanged next week, despite rising inflation. Gross domestic product grew 5.7% in the first three months from the same period last year, the statistics agency said on Thursday, up from the previous quarter's 5.5% but below the 5.9% forecast in a Reuters poll.

 

Let us begin this analysis by examining the GDP trend.

Figure 1 

After the Q4 seasonal breach, Q1’24 GDP dropped back to the exponential trendline support level, reinforcing it. (Figure 1, upper chart)

 

Originating from the pandemic recession in 2020, the secondary trend indicates that GDP growth will be significantly slower than in the pre-pandemic era.

 

Q1 GDP’s confirmation of this trendline validates our analysis from last November:

 

Regardless of consensus opinion, the coming GDPs will likely bounce within the range of the second trendline marked by the ceiling (exponential trend) and the floor (trend support).  The percentage change will be a function of base effects. (Prudent Investor 2023) [bold original]

 

It also implies that any pompous projections that disregard this trendline are likely to deviate.

 

Additionally, given the fragility of the nascent trendline and considering the evolving internal conditions, the likelihood leans towards a downside break rather than an upside.

 

Of course, since expenditures underpin GDP, authorities could induce another breach through monetary easing—essentially flooding the economy with currency—similar to the 2020 episode. However, this would result in a surge of inflation, which should offset the initial effects.

 

Or, incidences of an upside break could be "transitory" or unsustainable.

 

As a side note, the Philippine Statistics Authority (PSA) revised the national accounts data from Q1 2022. 

 

II. Why the GDP is Not the Economy

 

The GDP is a statistical construct of the economy, calculated based on technical assumptions embedded in its model. This model presupposes a perspective that the economy is centrally or top-down driven, making GDP a political statistic susceptible to biases and subject to the stratagem of incumbent political authorities, without any (independent) auditing process.

 

For example, the headline GDP can be inflated by understating inflation. While inflation increases the top-line or nominal numbers, a suppressed inflation rate widens the gap—the real or headline GDP. (Figure 1, lower graph)

 

One of the primary purposes of "painting the GDP tape " is to provide the government with easy access to the public’s income and savings by justifying taxes and borrowings, while another is to rationalize the exercise of political control over its subjects.

 

Furthermore, news headlines may portray a different economic landscape than that presented by the statistical economy

 

Here are some of the latest:

 

-Businessworld, March factory output falls, steepest in almost 2 years, May 9, 2024

-Inquirer.net, Over 5,000 PH garment factory workers lose jobs May 7, 2024

-ABS-CBN News, SM Investments Q1 net income up 6 percent at P18.4 billion but retail slips, May 8, 2024

-Manila Standard, Trade deficit narrowed to $3.2b as exports, imports fell in March, May 8,2024

-Inquirer.net, SWS: Families who suffer from hunger rises to over 14%; highest rate in NCR, May 01,2024

-GMA News, NCR office space rental prices seen to drop as vacancy levels increase — JLL, April 25, 2024

-GMA News, SWS poll: 46% of Filipino families consider themselves poor, April 25, 2024

 

Even if we somehow reckon that the GDP numbers reflect reality, who benefits from it? Cui bono? These headlines suggest it was not the average Filipinos.

Yet, why is there a difference in the presented number and the headlines?

 

Moreover, if the weighted average of the inflation rates of billionaires and the street poor can be considered as apples-to-oranges, wouldn’t calculating a similar weighted average growth for software design fees and palay harvesting result in a similarly flawed representation of the economy?

 

III. Net Exports as Key Driver of Q1 2024 GDP

Let us examine the expenditure side of the GDP.

Figure 2

 

Consumers were visibly scrimping while the government was also in a penny-pinching mode. Their real GDPs were up by only 4.6% and 1.7% in Q1 2024, respectively. (Figure 2, topmost image)

 

However, government spending excludes government construction and other capex expenditures.

 

Meanwhile, stagnation also affected gross capital formation, and imports, which grew by 1.3% and 2.3%, correspondingly. (Figure 2, second to the highest diagram)

 

On the other hand, exports (goods and services) which surged by 7.5%, delivered the goodies—via the net export route (exports minus imports).

 

In essence, exports signified the cornerstone of Q1 2024’s growth.

 

IV. The Money Illusion: Net Exports Increased Due to the Peso’s Devaluation

 

But other data on merchandise trade from the Philippine Statistics Authority presents a different perspective.

 

Exports in USD shrank by 7.6%. But due to peso devaluation, they rose by 6.9% when calculated using the average peso for the period. (Figure 2, second to the lowest left graph)

 

Semiconductor exports, which accounted for 46% share last March, contracted by .18% after a sizzling 32% growth last February. Though semicon exports (in million USD) bounced in March, it has been on a downtrend since its zenith in October 2022. (Figure 2, second to the lowest right chart)

 

The export slump partially explains the labor retrenchment in garment factories and the two-year drop in factory output.

 

The cited export data pertains solely to goods exports, which, in the context of the GDP, accounted for 46% of the total. Services represented the majority.

 

On the other hand, since the pinnacle in 2022, stagnation has also affected imports of capital and consumer goods (in millions USD).

 

Although consumer imports increased by 6.6% last March, capital goods imports plunged by 14.8%—marking the third straight monthly drop and its largest decline since August 2023.

 

Importantly, since reaching its peak in 2022, global trade (in millions USD) has significantly slowed. (Figure 2, lowest window)

 

Could this be symptomatic of the intensifying geopolitical tensions and monetary disorders?

 

In summary, a substantial segment in the increase in the GDP can be attributed to the effects of peso devaluation! The money illusion!

 

That is to say, inflation presented as economic growth!

 

Incredible.

 

V. Despite Record Low Unemployment Rates, Entropy in Consumers’ Spending Capacity

 

But why the sustained slowdown of consumer spending?

Figure 3

 

Despite the labor force reaching the second-highest employment (or second-lowest unemployment) rates in Q1 2024, consumer per capita income tumbled to its lowest level since 2021! (Figure 3, topmost chart)

 

Why would more jobs lead to reduced consumption? Could it be that the public has increased their savings?

 

Interestingly, retail, government (public administration and defense), and financial sectors have spearheaded year-to-date (YTD) employment gains. (Figure 3, middle image)

 

Has the surge in defense jobs signified a partial transition to a war economy?

 

Despite a 6% drop in March, part-time jobs accounted for 30% of the employed population. (Figure 3, lowest diagram)

 

Part-time jobs comprised almost all of the job gains last February (Prudent Investor, 2024)

 

Could the employment numbers have been exaggerated to boost the GDP and the approval ratings of the administration, or were the increases in jobs primarily low-quality positions?

 

VI. Weakening Consumers: Aggressive Consumer Borrowing and Drawdown in Savings

 

Furthermore, bank lending, primarily through consumers, played a crucial role in driving household consumption and industry GDP.

Figure 4

 

Universal commercial banks saw a significant 9.45% increase in their lending portfolio in March/Q1 2024, marking the third consecutive quarterly growth and reaching its highest level since Q1 2023. (Figure 4, topmost graph)

 

Household borrowing surged at a rapid pace of 25.4%, marking the seventh consecutive quarter of over 20% growth and the highest rate since Q2 2020!

 

In the meantime, production loans also saw growth, rising by 7.7% for the third consecutive quarter, reaching the highest level since Q1 2023.

 

In other words, without the growth in bank credit, consumer GDP would have cratered, potentially causing the GDP to contract!

 

Alternatively, even with the magnified use of consumer credit, the downward trend in household spending growth persists.

 

What would the household GDP look like without it?

 

Nevertheless, this represents a symptom that credit has supported household expenditures rather than productivity growth.

 

In the face of high inflation, consumers resorted to borrowing from banks and financial institutions to sustain their lifestyles.

 

But that’s not all; they have also drawn from their savings.

 

Consequently, for the banked population, this resulted in a sharp slowdown in peso savings growth from 3.13% in February to 2.15% in March. (Figure 4, middle diagram)

 

As a result, total bank deposit growth inched up from 7.86% to 8% over the same period, primarily due to the jump in FX deposits from 22% in February to 24.7% in March in response to the peso’s devaluation.

 

Rising domestic interest rates have barely induced savings; it is the fall in the peso that has driven increases in FX deposits.

 

So, does this represent confidence in the Philippine economy?

 

The thing is, consumers have been aggressively borrowing from banks and drawing from savings to cover their lifestyle deficit caused by persistent inflation and malinvestments.

 

It is unsurprising that this has limited their purchasing capacity regardless of the actual conditions of the labor market, which authorities have declared to be near full employment.

 

Surveys indicating the rising prevalence of hunger and increased incidences of self-poverty can be explained by this phenomenon.

 

VII. Consumer Entropy: The Lagged Crowding Out Effects of Fiscal Deficit Spending

 

Moreover, all this occurs even as the government has slowed its deficit spending.

The deficit to GDP ratio dropped to 4.5%—the lowest since Q2 2020. (Figure 4, lowest image)

 

Yes, government spending was subdued in Q1, but that represented direct expenditures. Nonetheless, the government's share of GDP continues to rise, which simultaneously comes at the expense of consumers.

Figure 5

 

The share of Household GDP fell from 75.1% in Q4 2023 (75.3% in Q1 2023) to 74.5% in Q1 2024, while the share of government surged from 11.9% to 14.1% over the same period. (Figure 5, topmost graph)

Q1 2024 GDP reinforced its respective long-term trends.

 

The redistribution effects of deficit spending and malinvestments become increasingly apparent over time.

 

VIII. Export Boom? Manufacturing Bounced in Q1 2024, But Finance Industry Dominated the Field

 

Like balance sheets, the obverse side of the GDP’s expenditure side is the industry.

 

If exports were booming as so-indicated by the Expenditure GDP, then manufacturing must be outperforming.

 

At 20%, manufacturing has the largest share of the industry GDP, nonetheless, it posted a 4.5% GDP—below the headline GDP, but signified the highest since Q1 2022.

 

Labor retrenchment in parts of the sector and the March plunge in factory data contradicts the PSA’s national accounts data.

 

What sectors boomed in Q1 2024?

 

Financials emerged as one of the fastest-growing sectors, registering a real GDP growth rate of 10%. Notably, the sector's share of the total GDP reached an all-time high of 11.5%, making it the third-largest sector after manufacturing (20%) and retail (16.4%). (Figure 5, middle window)

 

Banks significantly outperformed their non-bank financial counterparts, expanding by 12.7% in Q1 2024 and increasing their share of the industry's pie from 49.3% in Q4 to a historic 61.1% in Q1 2024.

 

The share of banks relative to Total Financial Resources hit the second-highest level of 83.42% last February, indicating the increasing GDP's financialization orfinancialization of the GDP or characterized by intensifying gearing or leveraging.

 

However, despite banks' substantial contribution to the GDP, Q1 2024 profit growth was only 2.95%, marking its lowest level since the pandemic recession in 2020!  (Figure 5, lowest graph)

 

Crucially, profit growth has been on a downward trend since peaking in Q3 2022, largely impacted by sharp declines in non-interest income influenced by rising rates, as well as the decrease in interest income.

 

Rising GDP, falling (inflated) profits while increasing systemic credit risks via massive expansion in leverage.

 

Incredible.

 

Figure 6

 

As a side note, the BSP declared that the country should benefit from the deluge of equity FDI flows for the month of February, which "came from the Netherlands with investments directed mostly to the financial and insurance industry." Equity and investment funds growth rocketed by 480% to USD 830 million, which pushed higher total FDI flows by 29.3% to USD 1.364 billon. (Figure 6, topmost chart)

 

If true, this translates to more players entering a saturated industry. We shall soon see how this impacts the economy.

 

IX. Q1 2024 Outperformance Led by Construction, Accommodation and Service Sectors

 

The construction industry is another sector that outperformed in Q1 2024. Despite its real GDP growing by 7%, its share of the national accounts' pie fell from 7.2% to 6%.

 

Government construction registered the highest GDP growth at 12.4%, marking the third consecutive quarterly decline in growth. Meanwhile, financial and non-financial construction posted a real GDP growth of 6.7%, the highest in the last three quarters, but significantly lower rates than those observed from 2022 through Q2 2023. Government and private sector construction accounted for 26% and 43.4% of the industry, respectively. (Figure 6, middle image)

 

However, the industry's GDP doesn’t reveal the distribution of activities or what percentage are part of Public-Private Partnerships (PPPs).

 

Finally, even with a 2.7% share, accommodation and services posted the fastest GDP in Q1 2024 with 13.9%.  The sector has outperformed its contemporaries in the last four quarters. (Figure 6, lowest window)

 

Nevertheless, based on share of the GDP, the sector has fully recovered from the pandemic recession troughs.

Figure 7

 

The surge in "revenge travel " and staycations has propelled accommodation GDP growth to a brisk 18.4%, compared to food services at 11.9%. Nonetheless, food services retain the largest share of the industry at 68.3%.

 

Although the industry zoomed, during the reopening of the economy, the pace of growth has since diminished.

 

In the face of harried and leveraged domestic consumers, the Department of Tourism data suggests a likely peak in inbound visitors. April arrivals grew by 2.92% year-over-year but shrunk by 9.6% month-over-month (MoM) for the second straight month. (Figure 7, upper graph)

 

While investors pursue recent growth by expanding capacity, industry prospects could be poised for a reversal from the current boom.

 

X. Trade and Real Estate Malinvestments: Supply Side Expands even as Demand Sputters

 

How about the trade and the real estate sectors?

 

While consumers struggle, the trade industry GDP improved from 5.2% in Q4 2023 to 6.4% in Q1 2024, its largest since Q1 2023. (Figure 7, lowest chart)

 

Retail GDP substantially improved from 5.7% in Q4 2023 to 7.3% in Q1 2024 while wholesale GDP steadied at 2.3% over the same period.

 

Retail trade accounted for 81.5% of the sector’s GDP, up from 79% in Q4 2023.

 

This divergence suggests that trade investors, like accommodation and food services, have splurged on building capacity, against the backdrop of consumers' diminishing spending capability.

 

The sustained divergence would likely lead to financial pressures on many retail outlets including national retail chains.

 

Financial pressures on the retail segment of SM, an economic titan, showcases this challenge. (SM has yet to report its Q1 17Q)

Figure 8

 

Lastly, the real estate sector, one of the most popular or say the crowd’s favorite, saw its GDP slow considerably from 5.5% in Q4 2023 to 4.1% in Q1 2024. (Figure 8, upper chart)

 

However, its share of the GDP bounced from an all-time low of 5.1% in Q4 2023 to 5.6% in Q1 2024.

 

Despite this, the sector’s share of bank lending continues to mount, it reached 20.7% in Q4 2023 and slipping to 20.6% in Q1 2024.

 

That is to say, while the public have jumped on the bandwagon to chase gains from the industry, often funded by increasing leverage, its contribution to the national economic value continues to decline—a manifestation of malinvestments.

 

Even the mainstream has become aware of the escalating accounts of vacancies, which they see as increasing further due to supply outgrowing demand.

 

While all eyes are on the sector bearing a pipe dream of its revival, oddly, the professional and business services sector has slowly and steadily been outpacing the former. It posted a GDP of 7.5%—its highest rate since Q1 2023.  

 

Interestingly, the sector’s economic contribution—measured by its share of the total—has been steadily outpacing the real estate sector since Q2 2022.  It had a 5.8% share against the 5.6% of the latter in Q1 2024. (Figure 8, lower window)

 

The professional and business services sector encompass various types of services, including legal, photographic, engineering, architectural, veterinary, and all other scientific and technical fields.

 

While many of its services appear to be closely linked with core industry groups, we can infer that its growth contribution arises from a relatively low starting point.

 

Consequently, economic risks may be considerably lower compared to other sectors.

 

So, despite the widespread economic maladjustments, viable opportunities still exist.

 

XI. Summary and Conclusion

 

Q1 2024 GDP retreated and reinforced its second but slower trendline, magnifying the risk of a breakdown.

 

As a result of the peso’s devaluation, net exports contributed most to the Q1 2024 GDP expansion.

 

The risks of violating the downside of the GDP trendline appear supported by the substantial slowing of consumer expenditures, driven by massive bank leveraging and a drain of savings.

 

Furthermore, the "build and they will come" mantra remains a model embraced by popular industries like trade, accommodation and services, and retail, backed by financing from banks, thereby raising systemic risks.

 

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.

___

 

 

References

 

Brandon Smith, Economic Earthquake Ahead? The Cracks Are Spreading Fast, March 7, 2024 Birchgold.com

 

Prudent Investor Newsletter, The “Surprise‟ Philippine 5.9% Q3 GDP Powered by Deficit-Spending and Bumped by a Statistical Facade November 12, 2023

 

Prudent Investor Newsletter, The Jump in February’s Philippine Employment Rate was all about Part-Time Jobs! BSP’s Consumer Sentiment: Stagflation Ahoy! April 14, 2024