Inflation, defined as an increase in the general level of prices, is not directly observable more than the general price level itself (also called “overall price level”). You cannot go to your local convenience store and order one unit of GDP, asking, “How much is it?” —that is, how much is the general price level for one unit of GDP, made of a fraction of an automobile, a few words of medical advice, a bit of an Amazon delivery service, a dozen bubble gums, etc.?—Pierre Lemieux
In this issue:
What Happened to the Blockbuster Election Spending Fueled 2Q GDP?
I. What Happened to the Blockbuster 2Q GDP? PCE Deflator Chopped Statistical Growth!
II. 2Q GDP: It’s Almost All about Election Spending!
III. One-off Consumer Election Spending Boom as Per Capita Consumer and GDP Trend Slows
IV. The PSEi 30 Reinforces the Slowing GDP Trend, Bear Market Rally on Low Volume
What Happened to the Blockbuster Election Spending Fueled 2Q GDP?
I. What Happened to the Blockbuster 2Q GDP? PCE Deflator Chopped Statistical Growth!
So what happened to the supposedly sensational 2Q GDP?
Up by only 7.4%, the 2Q GDP fell below the expectations of the consensus!
Rising prices reportedly negated whatever gains the national elections fueled.
In the last three weeks, I noted that the 2Q GDP signified nothing more than a statistical charade anchored on three factors: the low-base effect, muted CPI, and government spending.
Instead of a boost, the three factors bushwacked the GDP!
Let us first deal with the CPI.
With the statistical suppression, such as base rate changes, price controls, SRPs et al., had the CPI been higher, the GDP would have been much lower!
Figure 1
The implicit price deflator at over 5% pulled down the 13% nominal GDP to 7.4%. (Figure 1, topmost pane)
Worst, the difference between the nominal and real GDP is seen by authorities as expressive of growth!
In contrast, the households interpreted this as a surge in hardship as self-rated poverty polls suggested.
Or, by playing down the CPI, the government sold "growth" even when the public experienced a lowered standard of living!
II. 2Q GDP: It’s Almost All about Election Spending!
Next government spending.
How forgetful have the public been? It was in the 2Q where the national elections took place. The election spending spree should have done the GDP magic!
The growth of cash in circulation accelerated toward the May elections, rising by as much as 15.5% YoY last April. Though the rate was slightly slower than in the past, the comparison comes from a RECORD high base! (Figure 1, lowest pane)
We are talking of UNPRECEDENTED trillions of cash circulated nationally!
To go by the numbers, the peso YoY differentials of 'cash in circulation' last June 2022 from a year ago was Php 202.7 billion, signifying 59% of the Php 344.61 billion net real GDP growth of Q2 YoY!
Got that? (Election) Cash financed about 59% of the net Q2 GDP!!
To consider, spending from cash infusions occur with a time lag! That said, the Q2 GDP most likely experienced spending from the cash injections in the 2H of 2021!
And from here, the cash injections in the 1H of 2022 are likely to be felt in the 2H of 2022. And so the bullish guidance by the consensus. For them, it is all about spending anyway! To heck about productivity!
Amazing right? And yet the BSP downplayed the role of demand in the CPI!
Worst, they diminished the crowding out effect of cash infusions on the purchasing power of the peso.
Effect on GDP: The Election and Public Spending Transmission Mechanism
How did the government implement such cash injections?
They did it directly and indirectly or through their private channels.
Figure 2
Real government GDP stunningly tripled to 11.1% from 3.6% in Q1, which raised its share of the GDP to 18.1%, the second highest since Q2 2020!
And this excludes infrastructure spending. Government construction GDP soared by 22.7% in Q2, which pushed its activities relative to overall construction GDP to 52.8%, the highest ever!
Such expenditures did not emerge out of a vacuum; they represented an uptrend in nominal and growth rates prior to the elections.
But that is not all.
Several political projects via PPPs and outsourcing involve select private sector participants. These are firms of the elites and the politically connected.
Adjunct commercial activities of the national and local bureaucracy also involve many other private firms.
As such, cash injections into the political economy emanated principally from bank credit expansion and indirect interventions of BSP through banks (net claims). The BSP has resumed its QE to the national government last June.
In short, a complex web of select private and public (national and local) agencies functioned as channels for the percolation of election money.
That folks represent your GDP!
And while the GDP looks good from the outside, it is rotting from the inside. Aside from bank credit directed at political projects and consumption, public debt partly financed the record government spending binge, which rose to a record Php 12.791 trillion.
And while public debt growth slowed, private sector debt has accelerated. In all, the debt engines are running at full throttle.
Oddly while system leverage is in full steam, money supply growth has slacked off, most possibly indicating problems in the banking system.
Finally, financial repression and the inflation tax represents vital components of redistribution of the GDP, which comes at the expense of savings and productive investments!
III. One-off Consumer Election Spending Boom as Per Capita Consumer and GDP Trend Slows
Figure 3
How about the consumers? Did they not play a role in the GDP?
Some did. Unless one belonged to the principal beneficiaries of the political redistribution, the residuals, or one-off recipients, were primarily the wards and dependents of politicos.
Most didn't. Even the GDP captures it.
Though the household "real" GDP swelled by 8.6% in Q2, its share of the national income dropped to 68.2%, the second lowest in history! (Figure 3, topmost window)
The opportunity cost of record public spending comes at the expense of the private sector and its consumers. Again, such reasons explain why self-rated poverty expanded in the same period.
Yet, the consensus remains mesmerized by the supposed resiliency of domestic consumers, ironically, the GDP data continues to showcase its erosion.
Yes, some firms like JFC benefited from the election spending binge. (second to the highest pane, Figure 3)
Interestingly, the hotel industry was also a big winner in the 2Q, with its GDP tripling to 65.4% from 20.6% in Q1. (Figure 3, second to the lowest window)
Aside from the economic reopening, the swarm from the massive national election rallies must have boosted the industry, transforming it into a primary beneficiary of the election spending binges.
Unfortunately, the public barely realizes a deepening political centralization is hardly beneficial to the economy. Someone has to pay for the bureaucracy, political spending, regulations, and other mandates. And that someone is you and me. Further, political transfers don't add economic value.
The GDP data reveals this.
On a per capita basis, the GDP and household expenditures showcase growth from the 2Q from the "low base" angle. (Figure 3, lowest pane)
More importantly, it depicted a secondary decelerating trend. Yes, sadly, even the inflated GDP has been exhibiting a slowdown.
IV. The PSEi 30 Reinforces the Slowing GDP Trend, Bear Market Rally on Low Volume
Figure 4
I would further argue that this penchant for negative 'real' rates or the inflation tax will not only fuel higher inflation but also raise rates by crowding out savers and productive investments, leading to lower economic performance while magnifying credit and malinvestment risks.
Despite the massive distortions, curiously, PSEi 30 appears in conformity with the slowing GDP trend. (figure 4, topmost pane)
Interestingly too, to a certain extent, the stock market used to cheer a surge in inflation (2014 and 2017). But that is until monetary tightening choked off the excess liquidity. (Figure 4, second to the highest window)
At present, what is the maximum threshold level for the campaign to raise rates by the BSP to squeeze demand which may increase the risks of economic recession and credit events?
We can only guess. But unless forced by price pressures, the penchant of the BSP is to retain the inflation tax.
Ironically, such a redistributive regime fosters and nurtures the risks of inflation.
Interestingly, riding on the wave of expectations of "peak inflation," the PSEi 30 jumped 4.6% this week, its fourth week of gains for an aggregate return of 8.14%. Again, much of the week's advance came from aggressive pre-closing pumps.
Market breadth was impressive. Advancers had the best week since the week of June 5th, 2020. But surprisingly, the weekly market main board volume dropped by 8.21% to Php 6.17 billion from the other week's Php 6.7 billion! (Figure 4, lowest window)
In short, despite the substantial gains, market liquidity remains lackadaisical, exhibiting signs of short squeezes than from a radical improvement in sentiment.
Yet a sustained rise in stocks should eventually manifest increases in liquidity (via higher collateral values) which henceforth bolsters demand (increase lending). There seems to be a tight correlation between bank lending to the financial sector and the PSEi 30, which implies margin trades for equity speculation by financial institutions. (Figure 4, second to the lowest pane)
But doing so should likely go against the BSP objective to control the CPI.
Yet such represents a proverbial choice between a rock and a hard place for the BSP.
In the end, in a world transitioning away from globalization to the iron curtain, free lunches from central bank-sponsored low rates are history.
One can imagine how this affects the debt-dependent low-interest rate incumbent economic development models here and abroad.
Yours in liberty,
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