The reason social science calls itself a "science" is because of statistics. And their statistics are practically BS everywhere. I mean, really, everywhere. Nassim Taleb
In this issue
This Week’s 2Q GDP Announcement: Statistical Gains from the Low-Base Effect
I. Why Official Statistics Can’t be Relied On
II. Correlating 2Q GDP with Public Revenues, M3 and the CPI
III. The Downshift in CPI Trend is Likely Transitory as BSP Seeks to Maintain a Steep Negative Real Rates Regime
IV. Booming Global Trade Filters to Exports, Base-Effect Gains in Factory and Imports
This Week’s 2Q GDP Announcement: Statistical Gains from the Low-Base Effect
I. Why Official Statistics Can’t be Relied On
On Tuesday, August 10th, the 2Q GDP will be announced by authorities.
The consensus sees an astronomical GDP of 10% or more for this period mainly because of the low-base effect. That is, comparing estimated economic activities covering a period debilitated severely by an anomalously imposed economic freeze with an economy operating with about 70% of its capacity.
In this regard, it would be misleading to interpret as "growth" whatever number that the Philippine Statistics Authority (PSA) publishes that day.
In fairness, ask the countless numbers of entrepreneurs who closed shop and have found no substitute, and employees, who found themselves jobless, to see if they share this “growth” sentiment.
Below we will show some correlations that may suggest what the 2Q figures are. But as a caveat, such correlations should not be misconstrued as our predictions.
I do not engage in the game of "pin the tail on the donkey" guesswork on questionable statistics.
From our perspective, the economy is a complex process of feedback loops of human action, which, unlike the mainstream, sees the economy as an econometric construct.
As the great Austrian economist Ludwig von Mises taught us,
It is necessary to realize that all economic categories are related to human action and have nothing at all to do directly with the physical properties of things. Economics is not about goods and services; it is about human choice and action.
Ludwig von Mises, Why Capital Goods Are the Key to Economic Progress, July 27, 2021
To give you an example of why I can hardly trust statistics, here is the 1Q unemployment statistics from the PSA, as reported by CNN (May 6, 2021): More Filipinos were able to find work in March, data from the Philippine Statistics Authority revealed. National Statistician Dennis Mapa announced on Thursday an unemployment rate of 7.1% for the month, translating to 3.44 million Filipinos out of work. This is lower than the 4.19 million jobless in February, equivalent to an 8.8% unemployment rate.
The (former?) supporter of the incumbent administration, the SWS, has a different view.
From ABS-CBN (June 17): An estimated 12.2 million adult Filipinos were found jobless during the first quarter of the year as the COVID-19 pandemic lingered, a slight decrease from the previous quarter, a poll released on Thursday showed. This means that 25.8 percent of the adult labor force are still without jobs, lower by 1.5 percent from the 27.3 percent or 12.7 million Filipinos recorded during the fourth quarter last year, according to the Social Weather Stations (SWS) survey results.
See the shocking difference? The government sees the unemployment rate at 7 to 9% (3.5 to 4.2 million people) while the SWS observed it at 25.8% (12.2 to 12.7 million)! That's more than twice the official numbers!
Though government numbers are suspect, affirming the accuracy of the numbers from SWS is also not possible.
Official unemployment rates supposedly improved to around 7.7% in May and June. Even if there has been an improvement, the chasm between SWS and the official numbers should remain substantial.
In any event, because authorities will use these figures for their estimates, 2Q GDP numbers are suspect. And that's from the labor aspect only.
And with mounting pressures on the nation’s credit rating, authorities are likely to manufacture numbers palatable to multilateral and international creditors.
II. Correlating 2Q GDP with Public Revenues, M3 and the CPI
Again, construing comparison between normal and abnormal redounds to a false equivalence or apples and oranges. Nonetheless, the following correlations:
Public revenues jumped 15.02% in the 2Q 2021, its first growth following four consecutive quarters of decline. Yes, this positive number was a consequence of the low-base effect. Nonetheless, from 2009, each time public revenues expanded by about 15-16%, GDP grew by about 6-6.5%.
Next, the fiat currency banking standard depends on liquidity growth to finance and sustain the GDP. With bank lending in deflation, the BSP has become the primary provider of the current liquidity conditions. M3 growth has dropped to 6.5% in Q2 2021, suggesting the economy has barely been absorbing the BSP’s injections.
In Q1 and Q2 2019, M3 dropped 6.09% and 6.45%. During the same period, GDP grew by 6% and 5.5%, respectively. When M3 hit 8.76%, a nadir in Q3 2015, the GDP of the period was at 6.4%.
Third, rising CPI reduces the purchasing power of consumers and destabilizes the profit margins of entrepreneurs. The GDP has likewise exhibited the baneful effects of higher CPI.
The 2Q 2021 CPI registered 4.3%, lower than the 4.5% in the 1Q. July’s figure marks the third CPI cycle that had 4% and above in 8-years.
In the first cycle, when the CPI posted 4% above from Q1 to Q3 2014, the corresponding GDP grew by 5.6%, 6.8%, and 5.6%.
In the second cycle, when the CPI also soared beyond 4% to 6.2% from Q2 to Q4 2018, the respective GDP increased 6.2%, 6.0%, and 6.3%.
Again, while 2Q GDP will demonstrate the low-base effect, higher CPI and diminished monetary liquidity will likely subdue the gains.
III. The Downshift in CPI Trend is Likely Transitory as BSP Seeks to Maintain a Steep Negative Real Rates Regime
From the Businessworld (August 6): PHILIPPINE INFLATION eased to a seven-month low in July, lending support to expectations for the central bank to keep its rates accommodative. Preliminary data released by the Philippine Statistics Authority (PSA) on Thursday showed headline inflation at 4% in July, slowing from the year-on-year rate of 4.1% in June. Still, this was above the 2.7% print recorded in July last year.
From a trend perspective, despite the two-month slowdown, the uptrend in the headline CPI remains intact. However, July’s data confirmed the breakdown of the 6-year trend of the Core CPI. It remains to be seen whether the food-driven Headline CPI will follow the CORE or diverge from it.
Declining CORE CPI appears to have led the headline CPI lower in 2013-2014.
The CPI, typically, is preceded by the yield differentials of Philippine Treasuries with a time lag.
However, after the authorities declared that it would impose another ECQ, the bond markets were mixed or were ambivalent about the direction of the CPI and the policy response to it.
This August ECQ may only exacerbate financial tightening while exacerbating supply network disruptions.
From the Inquirer (August 5): The series of lockdowns in the country is pushing most food producers to the brink of collapse as demand even for basic commodities such as meat and fish is expected to decline during the two-week lockdown in Metro Manila starting Aug. 6. Making matters worse is Agriculture Secretary William Dar’s statement, issued in a press briefing on Wednesday, that the agency would not be giving dole-outs to agricultural workers and related businesses. Leaders of the poultry, livestock and fisheries industries said the closure of nonessential establishments as part of the strict enhanced community quarantine in Metro Manila and nearby provinces would lead to thousands of job losses and, in turn, to lower consumption of their products. Backyard poultry raisers in particular are expected to reduce operations again to prevent further losses.
Despite weak demand, evidence of higher prices from supply disruptions (and from VAT) as exhibited by the Markit IHS report last July: “Production levels fell for the fourth month running, though at only a fractionally quicker pace to that seen in June…. Workforce numbers were cut for the seventeenth successive month in July. Voluntary resignations were often reportedly not replaced, although some panellists attributed the fall in employment to lower output levels. The latest drop was the softest since March, and only marginally below the 50.0 no-change value, however….A combination of raw material shortages and virus-related restrictions led to another marked lengthening of supplier lead times. Vendor performance has now deteriorated in every month since August 2019… Buying activity increased only marginally, with growth now seen in two consecutive months. Meanwhile, amid hopes of greater demand and efforts to cushion against any future shortages, firms raised their pre-and post-production inventories at marginal rates. Higher prices for raw materials and the introduction of VAT to some goods added to input prices in July. The rate of inflation was sharp, despite moderating for the third month running. Similarly, factory-gate prices rose during the month, with panel members noting a partial pass-through of higher expenses and the impact of the introduction of VAT. The rate of increase was faster than the long-run series average, but eased from June's two-and a-half year peak.
Figure 3
Would the BSP allow for the real interest rates to turn positive? Positive real rates effectively remove the subsidies on public debt through inflation. Via 1-year bills minus the CPI, real negative rates hit a fresh record in July.
It’s the reason why the BSP announced the reactivation of its Php 540 billion direct financing of the National Government last July, which started in June that spurred a bounce in money supply growth.
The BSP reportedly floated the idea that it would resume cutting bank reserve requirements. From Businessworld (August 6): The BSP said lowering the RRR remains “on the table”, Bloomberg reported on Wednesday. The reserve requirement for big banks is currently at 12%, still one of the highest in the region. The central bank last cut big banks’ RRR in April 2020 with a 200-bp reduction.
What happened to the unprecedented rescue by the BSP on banks through historic liquidity injections, unparalleled relief, and other measures?
If the cut in reserve requirements occur, are these signs that the BSP is running out of ammunitions?
Moreover, in a catchup mode with earlier distortions, the falling peso will also impact prices.
From the Businessworld (July 5) FOOD COMPANIES are considering price hikes as global supply chain disruptions increase import costs, an industry group said. Philippine Chamber of Food Manufacturers, Inc. (PCFMI) Legislative Committee Chair Helen Grace Baisa said that the industry has been burdened with additional costs in importing raw materials and finished food products amid delays in the supply chain.
That said, there are meager signs that the stagflationary landscape will ebb.
IV. Booming Global Trade Filters to Exports, Base-Effect Gains in Factory and Imports
The manufacturing boom from the low base-effect.
From the Businessworld (August 6) The country’s factory output sustained its rebound for the third straight month in June, the Philippine Statistics Authority (PSA) reported on Friday. Preliminary results from the PSA’s latest Monthly Integrated Survey of Selected Industries showed the volume of production index surging by 453.1% year on year in June, faster than the revised 263.2% annual growth posted in May. This was also a reversal of the 80.6% decline in June last year.
Though not stated above, according to the PSA, factory input prices (Producer’s Price Index) remain in deflation in June, down by (-) 2.4%, but better than -4.1% a month ago. Once again, the PSA’s data conflicts with its own CPI and Markit’s observation.
Because of surging global trade, exports have indeed been strong.
From the Businesworld (August 6) The country’s trade-in-goods deficit in June shrank to its smallest amount in three months, although this did not prevent the year-to-date shortfall from surging faster than in the previous year, the Philippine Statistics Authority (PSA) reported on Friday. Preliminary PSA data showed merchandise exports during the month expanded by 17.6% year on year to $6.51 billion compared with a revised 30.8% expansion seen in May. Nevertheless, this marked a reversal from the 10.1% contraction posted in June of last year. Meanwhile, merchandise imports grew by 34.2% to $9.33 billion in June, compared with a revised 55.6% growth in May and the 20.8% contraction last year.
Global container shipping rates, as measured by the Harperindex, have gone parabolic. And part of that boom in global trade has benefited local exporters.
But import growth has mainly been about the low base effect. The declining trade deficit disputes the idea that greater demand for dollars has led to the peso’s weakness.
