The social function of economic science consists precisely in developing sound economic theories and in exploding the fallacies of vicious reasoning. In the pursuit of this task the economist incurs the deadly enmity of all mountebanks and charlatans whose shortcuts to an earthly paradise he debunks—Ludwig von Mises
In this issue
A Bounce is Not a Recovery: 2Q GDP 11.8% Boom: Low-Base Effect and Government Spending Boom!
I. 2Q 2021 GDP’s 11.8%: The Low-Base Effect, What You See Isn’t What You Get
II. Flaws in the Base-Effect: Differences in Surveys, Comparing Pre-Pandemic and Pandemic Statistics
III. Expenditure GDP: Household, Merchandise Trade and Durable Equipment Contributions Fell
IV. The Driver of 2Q GDP Boom: Government Consumption and Public Infrastructure Projects!
V. The Barely Seen Costs of Big Government/Neo-Socialist State
VI. Bank GDP Bolstered by “Unearned Income” or Subsidies
A Bounce is Not a Recovery: 2Q GDP 11.8% Boom: Low-Base Effect and Government Spending Boom!
I. 2Q 2021 GDP’s 11.8%: The Low-Base Effect, What You See Isn’t What You Get
Figure 1
From the BSP (August 11): The Bangko Sentral ng Pilipinas (BSP) notes the 11.8 percent growth of the country's Gross Domestic Product (GDP) in the second quarter of 2021. This is the highest year-on-year growth since the fourth quarter of 1988, when the Philippines recorded a 12 percent growth rate. With a manageable inflation outlook, the BSP continues to prioritize the use of monetary policy space to provide support to economic activity amid the pandemic. The accommodative monetary policy and liquidity-enhancing measures of the BSP continue to provide favorable credit conditions and the orderly functioning of the government securities market.
Giving themselves a pat on their back, the BSP seemed to have said, "you see, our policies worked! We did a good job!"
On a YoY % basis, sure, 2Q GDP was the second to the highest in history. But the BSP, in conveying information to boost the animal spirits, seemed hardly forthright.
Not only has this glowing number been in response to the historic 17% plunge of the GDP in the same period last year, but they barely stated that the statistical boost was predominantly a low-base effect. That is, the substantial loosening of economic activities in the 2Q 2021 relative to the economic freeze in the same period last year produced this anomaly.
And despite the boost, the real GDP in millions (Php) remained 7.2% down from the 2Q 2019 level and 12% below 4Q 2019.
What is more, despite the growth surge, importantly, because the 2020-2021 recession violated the baseline trend, the real GDP (million Php) seems in search of a new base and a new trendline or momentum.
The thing is, a bounce is not a recovery.
Interestingly, after about a few years, the consensus foresees the return of the GDP trend to its old baseline and recover its momentum.
Good luck with that faith in the statistical economy.
Curiously, following the announcement, many mainstream analysts downgraded their annual GDP forecasts.
II. Flaws in the Base-Effect: Differences in Surveys, Comparing Pre-Pandemic and Pandemic Statistics
Most strikingly, what you see isn’t what you get.
Part of that spike maybe due to inflated figures.
As previously noted, authorities must have used the 7-9% unemployment rate to calculate for the 2Q GDP 2021. SWS had a substantially greater figure of about 25%. Had the SWS number been used, such sterling performance would not have happened.
The point of this exercise is to show that perhaps because of politically slanted motivations, official numbers can't be relied on to provide an accurate estimate of the actual economic conditions.
And with mounting pressures on the nation’s credit rating, authorities are likely to manufacture numbers palatable to multilateral and international creditors.
This Week’s 2Q GDP Announcement: Statistical Gains from the Low-Base Effect August 9, 2021
And there is more.
Statistics fail to distinguish conditions before the pandemic and contemporary times.
In lauding the GDP spike, the BSP noted that "it continues to prioritize the use of monetary policy space to provide support to economic activity amid the pandemic".
Under emergency measures, regulatory conditions have drastically changed such that comparative numbers of several sectors, such as banks and the financial industry, with their pasts, are meaningless.
Citing the prospects of a downgrade, Fitch recently admonished local officials of the pantomime employed to embellish economic data.
From the Inquirer (July 21): President Duterte’s chief economic manager on Wednesday (July 21) said there could be a downgrade in the country’s investment grade credit rating judging from the recent deterioration in the Philippines’ debt and fiscal metrics using pre-pandemic standards. …The recent downgrade in the Philippines’ credit-rating outlook to “negative” from “stable” previously by Fitch Ratings was “reasonable,” Dominguez said in a Bloomberg TV interview. The downgrade was partly due to a ballooning debt and bigger fiscal deficit.
To emphasize, PRE-pandemic standards.
Remember this? From last June… (bold and italics original)
And another important thing, why the operational, capital, and regulatory relief measures, if not to minimize statistical or accounting impairments on the books of the industry?
It stands to reason that in reflecting the likely sanitization of data, there might have been a considerable understatement of the actual conditions in the bank statistics published by the BSP.
Again, had credit losses been manageable, the banks won’t need incredible amounts of liquidity injections AND relief measures from the BSP. Yet, it did.
BSP’s Confession: Leverage Represents The Key Risk Today; An Analysis of the State of Financial Stability June 13, 2021
With the prospects of a credit downgrade, the DoF Chief fundamentally admitted (implicitly) that the historic bailout of the banking system by the BSP included camouflaging the impairments plaguing the banking system through the embellishment of statistical data.
The effect of these collective measures has, naturally, dampened the bank and financial data on Non-Performing loans and distorted other relevant ones, including profits, capital ratios, asset quality, loan loss reserves, etc.
Needless to say, the unprecedented bailout bankrolled by the BSP dramatically altered the surveillance environment of the industry.
In essence, last July, Fitch called this bluff and dropped it on the DoF Chief.
In this way, authorities may have used the sterilized data from the banking and finance sector to generate the 2Q GDP.
III. Expenditure GDP: Household, Merchandise Trade and Durable Equipment Contributions Fell
The next concern is cui bono; who benefited from the 2Q GDP?
The statistical economy generated a divide: Sectors responding to the sweeping changes in the political-economic environment in response to the pandemic and sectors that supposedly added value to the GDP.
Illustrating this divide is the sectoral share in the expenditure GDP.
That real demand is a consequence of production and services; the diminishment of the latter two effectively limits the former.
So despite the loosening of the economy, business operations remained restrained by mobility controls and mounting political obstacles under the rubric of health protocols. In this respect, the subdued investment climate from such regime uncertainty has impeded a recovery in jobs, income, and capital formation.
Figure 2
No less than the FDI flow data of the BSP attests to such a constrained economic landscape. While the BSP’s FDI 5-month data in 2021 registered a 37% growth, it was down 25% in May. Yet, the overall FDI trend has been southbound since 2016. Further, the gist of the FDIs has been through debt instruments, which may not be about "investments". That said, dwindling FDIs are hardly a boost to demand.
Moving on, the unemployment rate likewise provides a window of existing demand.
In any event, as noted above, the statistical chasm between the official estimates and the SWS extrapolate to a wide discrepancy in demand.
Explaining Austrian Economist William Hutt’s view of Say’s Law, Robert Blumen masterfully describes the process of how unemployed workers contribute to a weakening of demand. (bold added)
Unemployed workers pause in their contribution to supply and so lose their power to demand. Workers not only demand consumer goods, but indirectly all of the higher-order capital goods required to produce them and the chain of services such as marketing and retailing that bring them to the consumer. The loss of demand for consumption goods ripples up the supply chain. As supply slows down, by Say’s law demand weakens as well. The sales revenues of firms in other industries decreases, and they may have to lay off workers as well. As these second-order layoffs decrease supply, they further decrease demand in a chain reaction.
Robert Blumen, Recession and Recovery: W.H. Hutt’s View July 29, 2021 Mises.org
I may add that this also affects the credit financing for consumer goods and higher-order capital goods, as well as, the ancillary services to market and deliver these goods and services to the consumers.
Goods of the higher-order are the vast array of producers’ or operational goods (from raw materials to intermediate goods) required for the transformation and production into consumer goods (first-order goods).
In applying the above, we find two things of note.
First, the published sales/revenues of listed retail companies in 2Q barely support the 2Q GDP of household consumption (11.5% current and 7.2% real) and the retail industry (7.1% current and 5.4% real).
I’ll publish the latter’s topline numbers when they are complete.
Second, even with the supposed increase, the share of the household (real) GDP to the headline GDP dropped to 67.6%, the lowest level since 1990! Stunning! And to consider, such numbers may even be inflated.
Above all, the pandemic has only accelerated a downtrend carved since 2002!
Even more, there has been a significant impairment of the uptrend of (peso-based) per capita household consumption!
Though the % YoY performance of the per capita consumption jumped 5.8% in the 2Q to Php 28,849, it is lower than the Php 28,831 of Q1 2021.
Like the national GDP, the violation of the momentum and trendline indicates a search for a new base and its attendant trendline.
Regardless of what statistics say, we know that the consequence of the continuing political obstacles imposed on the marketplace will lead to lower demand.
With a handicapped household, which sectors delivered the value-added component to the GDP?
Merchandise trade and durable equipment bounced from the low base effects.
The GDP of exports and imports jumped 27% and 37.8% in Q2. But the declining share of their respective share of the GDP underscores the low base effect. Since peaking in Q3 of 2018, the export and import share of the GDP has been in decline.
The growth rates of merchandise trade partly represented inflation pressures experienced globally from a spike in demand from political transfers in the face of massive supply disruptions and dislocations in the labor force.
Under gross fixed capital investment, durable equipment is the second-largest component. Its GDP bounced sharply by 81.3% (current) and 89.2% (real) GDP.
But then, the % share of this sector tumbled to 5% (current) and 5.6% (real), confirming a bounce from the low-base effects.
Outside the lows of Q2 2020, the share of real durable equipment GDP fell to a 2Q 2015 low.
The private sector was mostly sidelined in the 2Q.
A bounce is not a recovery.
IV. The Driver of 2Q GDP Boom: Government Consumption and Public Infrastructure Projects!
Figure 3
So, with households, merchandise trade, and durable equipment down, what sector took the lead?
The simple answer is the Government.
True, while public spending registered a 4.9% drop in 2Q, its % share of expenditure GDP soared to 17.5% (real), the second-highest level ever!
And there is more. The construction sector blossomed in Q2 to post fantastic GDP rates of 39% (current) and 33.4% (real). Nevertheless, its share of the real GDP catapulted to 16.6% from 11% in the 1Q. The reason for this, government construction GDP boomed with a record surge of 49.7%! It snared the sector’s leadership from the private sector with a monumental and unprecedented 52.4% share!
Public spending and government construction GDP accounted for a staggering 26.17% share of the GDP.
Again, these sectors account for DIRECT spending.
Under Private-Public Partnerships, with a significant segment of private sector resources participating in many political projects, such likely undercounts the extent of the politicization or diversion of resources to political objectives.
2Q 2021 GDP tells us that while the private sector bounced off the lows compared to a shutdown last year, economic activities in the GDP had mainly been about government activities.
Or, precisely put, 2Q 2021 GDP was about State control of the economy.
Socialism, according to dictionary.com, represents "theory or system of social organization that advocates the ownership and control of the means of production and distribution, capital, land, etc., by the community as a whole, usually through a centralized government".
V. The Barely Seen Costs of Big Government/Neo-Socialist State
Figure 4
And the deepening drift towards socialism is a bullish sign for the economy and capital markets?
But the government is not a producer of wealth. Through taxation and inflation, it commandeers resources from the private sector for its redistribution and survival.
Hence, record fiscal deficits are an expression of intensifying state control of the GDP from surging public expenditures.
No, Q2 deficits signified the third-highest on record, but the 1H deficit was a breakthrough.
And because the government was the main force behind the 2Q GDP, its expenditures were funded by debt. Public debt jumped 23.3%, the third-highest growth rate that sent nominal outstanding debt liabilities to Php 11.2 trillion or about 61% of the annualized GDP.
Aside from borrowing from savers through the capital markets, the BSP contributed to the funding of the National Government.
Through its Quantitative Easing, the BSP directly funded the National Government. The BSP’s net claims on the central government spiked by 64.8% in Q2 YoY. It also channeled its indirect financing with the banking and financial sector through the secondary market. The Financial system’s net claim on central government vaulted by 27.8% YoY.
While funding the National Government represented one of the goals of the massive debt buildup and monetary operations, ensuring the liquidity of the banking and financial sectors signified the other objective.
Further, to shore up the Gross International Reserves/Foreign Assets, which constitutes the foundation for BSP's monetary operations, FX debt also grew strongly, up 12.7% in Q2.
There are no free lunches.
The artificial juicing up the GDP for political reasons or the concealment of the actual economic conditions comes with varying costs and risks spread over time.
The following activities manifest the collective major political interventions with crucial impacts:
-the continuing forced discoordination of the factors of production owned and controlled by the private sector,
-the centralization of the economy through mounting regulatory regime, the surge in public spending, and the record deficits funded by skyrocketing debt,
-misallocation of resources from the BSP’s zero bound rates and QE, and
-the unprecedented measures to rescue the banking system by the BSP.
That said, such redistribution will not only lead to a decline in the standards of living, but should also magnify financial and economic risks, notwithstanding the possible social, health, and political hazards that are likely to emerge and surface.
And NO, the present health policies will likely not be the much-awaited elixir.
VI. Bank GDP Bolstered by “Unearned Income” or Subsidies
Figure 5
The Q2 GDP statistics exhibited a rebound in the bank-financial sector, which grew by a tepid 7.2% (current) and 4.2% (real).
From the industry GDP perspective, aside from the government, the financial insurance industry represents the other primary beneficiary of the present-day recession.
The GDP data exhibits such transformation. The uptrend of its share of the economy accelerated during the pandemic period. This uptrend, which commenced in 2001, signified a sign of the growing financialization of the economy.
Banks accounted for nearly half (or 46.8% share) of the sector’s GDP. Non-banks, insurance, and auxiliary services accounted for 37%, 11%, and 5.3%, respectively.
The thing is, under the pretext of the pandemic-induced recession, the unprecedented interventions and rescue measures implemented by the BSP radically transformed the monitoring of the health of the financial system. Pre-pandemic and present conditions represent apples to oranges comparison.
I’ll deal only with banks here.
Bank profits boomed in the 2Q, surging by 42.89%, representing the highest quarterly growth rate since 2013.
How did banks generate such profits?
Interestingly, with bank lending down, interest income slumped 13.3% over the same period.
But interest expenses plummeted 44.15% or by Php 46.68 billion. And with interest spread widening from a steeper yield curve, this reduced the decrease of net interest income to 3.44%. Thanks to the rate cuts and liquidity injections, the interventions of the BSP diminished the accounting net interest income losses of banks.
Amazing.
Furthermore, with banks increasingly dependent on asset speculation, non-interest income increased modestly by 5.22%. In fact, trading income slid 5.95%. Bank trades of FX and Non-Financial assets produced gains, but the decrease in non-trading profits of Non-Financial Assets offset these.
Finally, thanks to the operational and regulatory relief measures of the BSP, as well as from the low base effect, banks declared Php 48.852 billion less in loan loss provisions of banks or down by nearly half (46.12%) from last year.
The gist: banks were on a lifeline mode from the BSP.
-Rate cuts delivered a sharp drop in deposit expenses.
-Liquidity injections widened the interest rate spreads.
-Various relief measures led to lower provisions for loan losses.
The subsidies from the BSP, thus, ballooned bank profits to Php 122.67 billion in Q2 2021.
But there is something more.
Bank contribution to the GDP was not only reflected by policy changes that redistributed savings from "real" money savers to the industry but more importantly, the profits generated signified as "unearned income" or subsidies from the BSP’s monetary "zero cost out of thin air" operations.
That is, these inflationary measures to rescue banks came at expense of the general public.
Folks, this is your 2Q 2021 GDP!
A bounce is not a recovery.
