…the whole idea of GDP gives the impression that there actually is such a thing as the national output. In the real world, however, wealth is produced by someone and belongs to somebody. We’re not ants or bees working for the hive. The whole idea of a GDP just allows the “authorities” to bamboozle people into believing they can actually control “the economy,” as if it were some giant machine.—Doug Casey
In this issue:
Q3 7.6% GDP: Muddling Inflation for Growth, Jollibee Local Sales Disputes Food GDP Boom! The GDP is Not the Economy
I. Q3 GDP Surprise! Distortions Galore: Spread Between the NGDP and the Headline GDP Hits 2008 Highs!
II. Domestic Sales of Jollibee and Max’s Group Disproves the Food and Beverage CPI Boom!
III. Best Performing GDP Sectors, Food and Transport Reported the Highest Q3 CPI Growth!
IV. Q3 GDP, Follow the Money Trail: Massive Leveraging of Consumer and Public Sector Balance Sheets
V. Booming Import GDP Manifested Inflation than Growth!
VI. A Return to Pre-Pandemic Life? The GDP is Not the Economy
Q3 7.6% GDP: Muddling Inflation for Growth, Jollibee Local Sales Disputes Food GDP Boom! The GDP is Not the Economy
Philippine authorities reported an unexpected boost in Q3 GDP to 7.6%.
But aside from the base effects, the GDP was powered by credit-financed consumer spending, the aftermath of election spending, and public spending expansion.
Worst, the GDP data masked the impact of inflation, resulting in its embellishment. Nonetheless, the evidence of spending binges reaffirms the "stickiness" of price pressures in the economy, which should translate to higher rates.
Figure 1
I. Q3 GDP Surprise! Distortions Galore: Spread Between the NGDP and the Headline GDP Hits 2008 Highs!
To the delight of politicians and the establishment, Q3 GDP, which posted a 7.6% YoY increase, sharply beat the consensus expectations in the face of the ravages of inflation.
From their perspective, this data paves the way for the "return to the pre-pandemic life."
The thing is, as a political statistic, political agenda may have influenced its calculation.
That said, Q3 GDP revealed several distortions.
To begin with, the spread between the nominal and the headline GDP reached its highest level since 2008! (Figure 1, topmost pane)
Yet, in both periods, inflation placed a shroud on the economy. But in 2008, the headline GDP eventually slowed to a crawl to tinker with a recession. With four quarters below 2%, 2009's annual GDP was only 1.4%. Back then, there was little leverage in the balance sheet of the public and private sectors.
In Q3 2022, however, the headline GDP, net of the (inflation) deflator, assumed that the economy delivered more goods and services than from price levels!
But this is hardly true.
Using the manufacturing data from the Philippine Statistics Authority (PSA), the same agency responsible for the publication of the GDP, since the production value has grown substantially faster than volume, this contravenes such assumptions. (Figure 1, second highest pane, left)
In Q3, manufacturing GDP grew by 8.9% (nominal) and 3.6% (real). In their other statistic, the "money illusion" is attributable to the industry's performance.
II. Domestic Sales of Jollibee and Max’s Group Disproves the Food and Beverage CPI Boom!
And another instance. The incompatibility of the Food and Beverage GDP with actual "micro" developments.
As credit flowed profusely into the economy, this reportedly prompted a spending boom in the current-based food (restaurant) GDP! The food and beverage services GDP spiked by 38.8% (current) and 31.3% (real) in Q3. (Figure 1, second highest pane, right)
Yet if the domestic sales of leading fast food chain Jollibee (JFC) should serve as a yardstick, its remarkable sales growth of 46.88% YoY signified mainly a product of a low-base effect from the pandemic lockdown days.
But on a quarter-on-quarter basis, domestic sales stalled (-.85%) in Q3! The momentum of JFC's sales growth appears to have culminated. (Figure 1, second to the lowest window)
And quarterly sales trend of the Max's Group resonated with JFC. (Figure 1, lowest window)
Contrastingly, the Food and Beverage GDP spiked by 16.5% Q-o-Q.
Interestingly, JFC's domestic sales of Php 33.01 billion in Q3 accounted for about 47.8% of the food and beverage nominal GDP over the same period! If the GDP is accurate, JFC's domestic sales should have a crucial sway in the Food and Beverage GDP!
But JFC's sales data doesn't winnow between prices and quantity of goods sold. Profit margins may not be a reliable gauge.
Simplified, JFC's sales data provides no distinction on how much of the firm's turnover represented inflation or the "money illusion."
As an aside, the firm's "historic" revenues, as presented by the media, emanated from its international sales!
Needless to say, Jollibee's performance failed to corroborate the Food and beverages GDP, one of the best-performing sectors of the period!
III. Best Performing GDP Sectors, Food and Transport Reported the Highest Q3 CPI Growth!
Figure 2
By sector, the Food and Beverage GDP subsumed into the Accommodation and Food GDP sector posted the highest increase at 46.8%.
With GDP at 39%, the transport sector took the second spot.
By extension, based on the CPI during this period, the highest price increases occurred in the restaurant and transport sectors! (Figure 2, top window)
Q3 CPI averaged 15.7% and 4.07% for the transport, accommodation, and food sectors.
So, the increases in the nominal GDP must have been influenced primarily by price inflation.
Worryingly, the GDP exhibited consumption, financed by intensified balance sheet gearing, sparsely supported by production.
In effect, the data revealed too much nominal GDP chasing too few goods.
So how can there not be inflation?
All of the above reveals blatant distortions in the GDP. In particular, the headline GDP must have UNDERSTATED the CPI deflator or OVERSTATED the NGDP.
It could even have both!
Or, the Q3 data camouflaged the loss of purchasing power of the nominal GDP, expressed in revenues, income, profits, and wages.
To be sure, surveys on hunger, self-rated poverty, and worsening job quality embody such dissonance.
Or, with all these, how valid is the GDP? Instead, is the GDP representative of the conditions and veiled interests of politicians, bureaucrats, and the elites?
IV. Q3 GDP, Follow the Money Trail: Massive Leveraging of Consumer and Public Sector Balance Sheets
The GDP does not operate in a vacuum. It needs financing.
From last week: "In general, the accelerating bank credit expansion has bolstered the CPI. Bank credit grew 13.02% in September. Together with debt and inflation-financed public spending/deficit, these inflationary forces will also be a factor in the GDP. (To be released this week)"
The banking system's consumer credit expansion, which has been accelerating, has powered household consumption GDP in Q3. Instrumental to it are the record growth in credit card and salary loans. (Figure 2, middle window)
Possibly, consumer real estate loans could have also provided fuel. But this data has yet to be published.
But there is more. The ramifications of the BSP and banking system's liquidity injections are asymmetric and intertemporal.
Or its impact on individuals, specific enterprises, and industries varies in scale and at different times. As primary recipients, the biggest beneficiaries are those closest to the sources of money supply growth (Cantillon Effect), particularly the government and elite-owned firms.
The economic reopening magnified the spillover effects from the record infusions by the BSP in 2020, manifested partially through consumer spending and primarily through the government.
Evidenced by the outgrowth of cash (M1) in the pre-election days, the lagged effects of pre-election financed spending of consumers diffused into Q2 and Q3 GDP. But its impending corrosion stems from diminishing returns and inflation. (Figure 2, lowest window)
In any case, public spending growth likewise translates to the expansion in public debt.
Yet, public spending GDP remains on an uptrend, coming at the expense of consumers. (Figure 3, highest pane)
Public spending GDP excludes construction, which continues to corral a substantial value-added GDP share of the industry. (Figure 3, middle pane)
Part of spending by the private sector on construction has also been in Public Private Partnerships (PPP) projects, thus understating the contribution of resources and finance to political expenditures.
These efforts to centralize the economy effectively "crowd out" the private sector.
In this way, systemic leveraging (public debt plus bank loans) reached Php 23.6 trillion in Q3, representing about 106% of the GDP. (Figure 3, lowest window)
Not included in it are the other forms of leverage.
V. Booming Import GDP Manifested Inflation than Growth!
Some sectors benefited from inflation.
Figure 4
The outperformance of Merchandise trade (exports and imports) also helped bolster the Q3 GDP. Exports posted a 13.1% growth while imports increased by 17.3%. (Figure 4, upper pane)
But this could be a mirage.
Fuel products dominated import growth, thereby increasing its contribution share of the total in Q3. The sharp increases in fuel imports highlighted inflation more than the value-added component.
Yet, its opportunity cost constituted the slower growth in capital and consumer goods imports, which saw a decline in their respective shares. (Figure 4, lowest pane)
The import segment provides further evidence that the suppression of inflation magnified statistical growth.
As for exports, the layoff of 4,000 workers, representing 25% of their workforce in an industrial zone in Mactan, Cebu, should tell a different story from the GDP.
Nevertheless, the outgrowth of imports primarily due to fuel products widened the trade deficit to a record!
VI. A Return to Pre-Pandemic Life? The GDP is Not the Economy
In closing, authorities and the consensus pound the table to insist that its current pace will lead to a return to a "pre-pandemic life."
But even their statistic dispute such a hyperbolic claim.
Figure 5
The "impressive" growth numbers have barely returned the GDP trendline to its original path.
In contrast, the GDP trend has operated on a slower one. But the headline growth rates have been amplified by the base effects. (Figure 5, upper window)
Even on the premises of per capita, the national and household GDP have been surfing below the original direction. (Figure 5, lower window)
The ultimate takeaway, the GDP is not the economy.
