Well the way I feel is the way I write
It isn't like the thoughts of the man who lies
There is a truth and it's on our side
Dawn is coming, open your eyes
Look into the sun as the new days rise
-José González, Stay Alive from the Soundtrack of "The Secret Life of Walter Mitty"
In this issue
2Q GDP: Crowding Out Syndrome: TRAIN Worsened Consumer Woes, Economy Booms for the Government, Bullseye on Boracay!
-Bullseye Again! The Leadership Admits to the Unintended Consequences of the Boracay Shutdown
-The Economy is in Doldrums: President Duterte Did Better Than The Economic Forecasting Cartel
-Crowding Out Plagues the 2Q Expenditure GDP: TRAIN Worsens Household Consumers Plight
-Public Construction GDP Boomed as Real Estate and Rental GDP Fall to Multi-Year Lows!
-Instead of Capital Formation, 2Q GDP Showed Capital Consumption
-Industry GDP Growth Solely on Government-Driven or Influenced Sectors
2Q GDP: Crowding Out Syndrome: TRAIN Worsened Consumer Woes, Economy Booms for the Government, Bullseye on Boracay!
Bullseye Again! The Leadership Admits to the Unintended Consequences of the Boracay Shutdown
Last April, I predicted,
For the statistics is economics crowd, Boracay’s closure means nothing. Php 20 billion lost Period. But Boracay represents a network of human enterprises connected by a latticework of demand and supply chains.
Thus Boracay’s closure would have a spillover effect to the economy. Remember this? (bold added)
The tourism industry directly accounted for 8.2% and indirectly 19.7% of the 2016 GDP (World Travel and Tourism Council 2017 report) and is about to get some nasty drubbing, in almost all aspects, output, earnings, investmentsand jobs. And the coming slowdown will certainly spread to the economy.
See The March to a Neo-Socialist State: Duterte Administration Opens a War Front against Jollibee and PSE, Escalates War on Boracay and UBER-GRAB! April 10, 2018
In May 6th I followed this up with,
And there is the Boracay factor which will sap liquidity in the system at the margins. With commerce having been substantially curtailed, there will be substantial dislocations in the flows of credit. Bad loans will rise in the region.
Though Region 6 will be the most affected by liquidity disruptions, this will likely spread to the nation. And liquidity conditions are also anchored on demand and supply chains. Other forms of interventions — such ENDO, TRAIN, mammoth fiscal deficits and more — will also reduce trade and diminish liquidity in the system.
May 21:
In the 2Q, the impact of the closure of Boracay will make its initial appearance on the economy and in the performance of listed firms. The establishment has downplayed largely the ramifications of the war on Boracay (and tourism). Supply and demand chain linkages, as well as credit flows, have been ignored.
And Boracay will piggyback on the vortex of a mishmash of political interventions which should have unintended consequences
With the populist environmental politics taking the helm of the leadership’s governance I warned,
Environmental restrictions on tourism, fishing, fish culture and others will combine with the higher inflation tax that should further weaken the productive sectors of the economy as the government continues to sequester resources and finances for its boondoggles.
The Era of Easy Money is OVER! President Duterte Confirmed This With “The Economy Is In Doldrums” June 24, 2018
Here is the administration’s response to the drop in the 2Q GDP, from the Inquirer (August 9): “Socioeconomic Planning Secretary Ernesto Pernia reportedly attributed the slowdown to the closure of Boracay and regulations in the country’s mining sector. But Roque said: “We don’t approach policy purely on an economic and financial basis. The President of course, will exercise the powers of the state known as police powers to protect also the environment.”
On the Mark! Bullseye!
Figure 1
Hotel and Restaurant GDP plummeted from 7.5% in the 1Q to 2.4% in the 2Q! [upper pane]
And to corroborate on the sector's 2Q GDP’s plunge, for three consecutive months, the sector's bank credit barely rose (+1.16% April, +2.62% in May and +1.12% in June) [middle window]
Though the industry has accounted for a measly share 1.6% of the nation’s real GDP in the 2Q, it has been more than about simplified statistics. It is easy to dismiss Boracay, its 2017 revenue of Php 56 billion looks like a drop in the Php 1,377 billion tourism bucket (World Travel and Tourism Council 2018 Philippines Annual report)
As I have been stating, since economic activities represent human action, these constitute a process of spontaneous coordination of complex and dynamic decentralized supply and demand chains.
Disrupt the chain, the economic process suffers. The economy withers.
Though data show the estimated GDP and actual bank loans involved, unreported are effects on the quality of bank credit portfolio for industries attached to Boracay (directly and indirectly).
The banks will barely admit to rising accounts of NPLs, but their balance sheets will exhibit some symptoms of these. As I will write soon, as of the 2Q, the banking system appears to be in a bad shape.
And here is the rub.
Dislocations from political interventions have lasting effects, as markets adjust to a new environment. And if the commercial environment remains restrictive, not only will recovery take time, but it may not generate the same state as when the economy had been freer.
The scheduled reopening on October 26 will hardly bring about a full recovery from the disruptions caused by radical repressive policies
The degree of political interventions essentially determines Boracay’s economic destiny
The takeaway: For Boracay, things will get worse before it gets better. That is if it gets better at all. If politicians force their whims on the island, Boracay’s depression may last longer than popular expectations.
As a final note, the Department of Tourism tells us that even in the absence of Boracay, “tourist arrivals in the country jumped to an “all-time” high in the first half of the year”
Yes, it hit an “all-time” high last January. Boracay closed on April 26th. But as of May, tourism arrivals dropped by some 26% from the January highs. [lower pane]. May’s data is lower than July 2017. Though one month may not be a trend, the fact that the May 2018 data has been lower than July 2017 partly dispels the notion that Boracay didn’t matter.
In politics, the spinning of statistics is the name of the game.
The Economy is in Doldrums: President Duterte Did Better Than The Economic Forecasting Cartel
Boracay has epitomized the structural changes in the Philippine political economy
It has showcased how the National Government (NG) has taken control of the economy away from the private sector
The growing footprints of the NG have been embedded deeply in 2Q GDP, which ironically fell to a three year low.
Not a single establishment analyst rightly called the dismal showing of 2Q GDP!
On the other hand, President Duterte had it better when he said that the “economy is in the doldrums”!
Only ex-post has mainstream experts begun to mark down GDP projections. Such reveals the cartel-like behavior of the economic forecasting industry: radical deviation from the consensus represents a taboo. Every member has to “toe the line”.
The NG’s Philippine Statistics Authority (PSA) gave a clue a day before the 2Q GDP announcement. It revised the 1Q GDP lower from 6.8% to 6.6%. The sizeable 200 basis points reduction signaled a possible loss of momentum for the 2Q GDP.
And indeed it was.
Similar to asset and liability of a balance sheet, the expenditure and the industry constitutes the survey based econometric constructed GDP.
The expenditure GDP represents demand, capital formation, and merchandise trade.
On the obverse side, the industry GDP accounts for the supply side.
Crowding Out Plagues the 2Q Expenditure GDP: TRAIN Worsens Household Consumers Plight
From the demand side, since mid-2016, government and consumer spending have gone in opposite directions.
Figure 2
Lo and behold, the crowding out syndrome in motion!
Government spending continues to outgrow household consumption.
In the 2Q, while government spending real GDP posted an 11.9% growth, which was lower than the 1Q’s 13.6%, it was more than double the rate of household consumption at 5.6% in the 2Q and 5.7% in the 1Q. 4Q 2017 Household consumption was at 6.2%.
Since government spending doesn’t come for free, it has been funded by the private sector partly through the inflation tax and the recent increases in consumption taxes through the imposition of the TRAIN Law (RA 10963).
Notice that statistical inflation has been in an uptrend from the end of 2015 (as the BSP engaged in QE) which has partly coincided with the decline in household consumption. [lowest pane]
Notice too that the 2006 CPI, which the PSA discontinued publications last June, was at 5.7%. Since the difference between the 2006 and the current 2012 base has been about 60 bps, under the former (2006 base), July CPI would have been at 6.28%!
In reality, street inflation has been HIGHER than indicated for the BSP to have raised policy rates by 100 bps in 4 months!
Here is the thing.
The GDP data also suggests that the boost from the recent income tax cuts had been insufficient to reinvigorate household consumption spending in the 1H of 2018. In essence, TRAIN 1.0 had failed miserably to support consumer spending! (Household consumption from the 4Q 2017 6.2%, 5.7%, 5.6%)
The Department of Finance (DOF) ought to look and vet at their statistics before they shove down TRAIN 2.0 into the throats of the Filipinos.
Because government spending growth continues to outclass the household, its share of the GDP has increased, which comes at the expense of the consumers. Government’s share of GDP rose to 13% in 2Q from 1Q’s 11.06% while the household’s share fell to 66% from 1Q’s 69%! Government and Household share of consumption in 4Q 2017: 9.02% and 72.49%!
The household share of the GDP dropped by a whopping 8.9% since end 2017 or since TRAIN was implemented.
2Q GDP shows that through the crowding out syndrome, the household had been compelled to transfer a massive amount of resources furtively to the NG!
Should you wonder now why the economy is in the doldrums???
The buck doesn’t stop here.
Public Construction GDP Boomed as Real Estate and Rental GDP Fall to Multi-Year Lows!
Figure 3
Though build, build and build slowed slightly, the public sector construction GDP continues to bustle.
In the 2Q, it posted a GDP of 21%, for a third consecutive quarter of above 20% growth rate. Meanwhile, private construction GDP improved slightly in 2Q with a 7.9% GDP from 6.7% in 1Q and from .6% a year ago
In the 2Q, the share of public construction to the Gross Value in Construction jumped to a remarkable 40.48% or nearly double from 20.79% in the 1Q 2018.
According to the Department of Budget and Management, gross infrastructure spending rocketed by 41.6% in the 1H!
If the current rate of growth continues, public construction will dominate the construction industry by the end of this year.
As a caveat, it isn’t clear whether private construction GDP includes Private Public Partnership (PPP) projects.
However, the real estate and rental real GDP says YES. That’s because the sharp downturn in their real GDP has signified the opportunity cost of “build, build and build”! Real estate real GDP plunged to 4.5% in 2Q from 11% and 8.1% in 1Q and 4Q17. Real estate GDP lost about half its 1Q rate!
Meanwhile, rental GDP tumbled to 2.8% in 1Q and 3.6% in 2Q from 8% in 4Q17.
What’s more: 2Q real estate GDP have plumbed to 2008 lows, while rental GDP fell to 2012 levels! Then, these numbers were accompanied by National real GDP of 4-5%. With a far larger share today, it is a wonder why such drop in real estate GDP hasn’t dragged the headline GDP lower.
Instead of Capital Formation, 2Q GDP Showed Capital Consumption
Figure 4
Even in the durable equipment sector, projects directed or influenced by the government have propelled its GDP.
Construction and mining equipment GDP spiked 53.3%, telecom equipment soared 43.6%, and road vehicles jumped 28.9%. Their respective shares of the 2Q durable equipment real GDP were 7.75%, 11.8% and 30.47% to account for a slight majority or a 50.02% share.
Telecom giants have been increasing aggressively their investments (For 2018, PLDT $1.09 billion, Globe $950 million) to meet the Philippine President’s directive to improve on their services and to position against a third potential competitor.
On the other hand, as part of its Php 417 billion PUV modernization program, the NG, through the Department of Transportation,has rolled out an initial batch of 150 modern jeepneys last July. These units may have been part of the 2Q’s road vehicle GDP.
In the meantime, import (+19.7%) and export (+13.0%) GDP showed substantial improvements in the 2Q at rates double the 1Q GDP (imports %, exports %). Domestic spending on politically directed or influenced projects constitutes a significant segment of imports.
In a nutshell, the opportunity cost of commandeering the economy away from the productive private sector enterprises towards a consumption-based public spending has been a lower GDP.
Of course, GDP represents a statistical economy. The NG may produce numbers it wants to show. There is no audit for the GDP.
However, theory tells us that regardless of what statistics say the move towards a centrally planned economy leads to reduced standards of living. So far, even the government’s numbers have affirmed such developments!
Industry GDP Growth Solely on Government-Driven or Influenced Sectors
Industry GDP likewise exhibits the shift towards a centrally planned economy through sectoral movements.
The slowdown was unanimous among all major industry categories.
Agriculture GDP crashed to .2% from 1.1% in the 1Q. The industry sector GDP similarly dived to 6.3% from 7.7% in 1Q.
The saving grace was the services GDP which was lower marginally at 6.6% from 6.8% in the 1Q.
Only three of the 12 subsectors reported increases.
Figure 5
The public administration and defense sector (+15%) and the financial intermediation sector (+8.7%) supported gains by the construction sector (+13.5%)
Aside from the construction sector, intermediation services from the financial sector facilitated the gargantuan financing requirements of the flourishing centrally planned economy.
And under the OTHER SERVICES category, which recorded a decline because of the hotel and resto and health GDP, education and sewage GDP also soared.
Education GDP jumped to 11.2% from 9.5% 1Q18 and 7.4% in 4Q17. Sewage GDP increased to 5.7% from 5.4% 1Q18 and 3.6% in 4Q17.
Free college and other public education expenditures may have boosted the former’s GDP. The boom in the Sewage and Refuse Disposal may be tied with the infrastructure boom
These sectors were unable to weightlift the national real GDP because the cumulative share of the aforementioned sectors’ GDP accounted for only 24.72%
Meanwhile, the heavyweights have struggled.
Manufacturing and the bubble sectors, trade and real estate, which constituted 49.87% share of the industry real GDP, registered lower 2Q GDPs. 2Q GDP for these sectors were 5.6%, 6.1%, and 3.7%, respectively. Trade GDP was lower marginally compared to 6.2% in the 1Q, while manufacturing and real estate were down significantly from 1Q’s 7.6% and 4.9%
Although the decline in real estate activities doesn’t seem to match reported revenue growth by PSE listed firms.
To add, Mining GDP registered a sharp 10.9% contraction in the 2Q.
Finally, the marked downshift in GDP has likewise been reflected on per capita numbers.
Per capita GDP dropped to Q2 2015 level while per capita household spending has stagnated at 3.9% and 4.0% for 3 of the last 4 quarters. The numbers for Household per capita was last seen in 2014.
The moral of the 2Q GDP: It’s half full or half empty depending on the role played.
The “economy is in the doldrums” for private sector enterprises which operate in the service of market forces.
The economy is booming for the government, the elected public officials, the bureaucracy, and for enterprises servicing government projects.
Now you should know how and where to position.
