3Q GDP: Record Fiscal and BOP Deficit Equals Rapidly Expanding Government Share of the Economy

Metrics are always always gamed: a politician can load the system with debt to “improve growth and GDP”, and let his successor deal with the delayed results—Nassim Taleb

In this issue

3Q GDP: Record Fiscal and BOP Deficit Equals Rapidly Expanding Government Share of the Economy

-3Q GDP Reinforces the March to a Neo-Socialist State and the Trend of Economic Entropy

-Expenditure GDP Boosted by Government Spending, Public Construction and Government Influenced Imports

-Industry GDP: Vibrant Government Sectors as Race to Build Supply Industries Struggle

3Q GDP: Record Fiscal and BOP Deficit Equals Rapidly Expanding Government Share of the Economy

3Q GDP Reinforces the March to a Neo-Socialist State and the Trend of Economic Entropy

3Q GDP confirms only two forces:

One, the deepening march toward a neo-socialist state

The actual public spending to NGDP ratio is 19.96% which is slightly lower than my earlier estimates of 20.15%. Nonetheless, it still is at the highest level since at least 1998. Even more, the ratio registers the biggest bps increase annualized with a quarter to go!

Rising Risks of a Fiscal Crisis: Record Public Spending Share to GDP! BIR Revenue Plunged 8% in September! Public Debt Servicing Costs Rockets! October 29, 2018

3Q GDP incorporates both estimated direct and indirect exposure of the government to the economy.

Second, economic growth has been on a long-term downtrend.

Figure 1

The government’s data reveals that PER CAPITA GDP has been on a steady declining trend since 2013, a pre-Duterte era, which has coincided with the BSP’s phenomenal combustion of money supply growth. (figure 1, upper window)

Since Mr. Duterte assumed office, PER CAPITA Household consumption headed south with an acceleration in its decline since Q4 of 2017.

Per capita means per person. So PER capita GDP and Household consumption mean economic and consumption growth per person. 

SSShhh. 

Nobody ever talks about this, even when you can find it here.

That is because GDP is supposedly about an entitlement to feel good numbers than for any serious vetting of the economy. Such is why the consensus will keep on missing growth forecast, as the 3Q, because they have been programmed to see trends in one direction: upwards!

And such is also because convenient mendacities spur invisible wealth transfers from gullible savers to cunning and covetous vested interest groups. The asymmetry in power distribution provides free lunches to the latter!

Last week, I asked, “And does the decline in both bank lending growth rate and M3 presage GDP lower than consensus estimates?”

Falling Rates of Bank Lending, Liquidity, and Government Revenues Point to 3Q GDP Lower than 6%, What Policy Tool Remains to Combat Hissing Bubbles? November 4, 2018

Well, the answer is yes!

Though the 2Q GDP of 6% was my benchmark, its upside revision to 6.2% necessitated a corresponding adjustment on my target too

Thus, without the use of fancy and presumptive econometrics, declining bank loans, M3 and tax revenues foretold of a weaker 3Q GDP of 6.1% marginally lower than the 2Q! (figure 1, lower window)

Expenditure GDP Boosted by Government Spending, Public Construction and Government Influenced Imports

And the GDP has become more dependent on the government’s contribution.

Figure 2

From the expenditure side, with real government consumption growing at an accelerating rate of 14.3% in the 3Q, real consumer spending continued with its cascading trend with 5.2% growth. Government consumption grew by 11.9% and 13.6%, while consumer spending increased by 5.9% and 5.7% in the 2Q and 1Q respectively.

The Socioeconomic Planning Secretary Ernesto Pernia reportedly attributed the downturn in household consumption as havingbeen “dampened by high prices as inflation soared to 6.2 percent in July to September”, in particular, “With high prices, the demand tends to be dampened. Especially food prices remain to be elevated,” he explained, adding that if not for the high inflation, growth would have been within the 6.5 to 7.0-percent range.”

So increases in general price levels of the economy, as a result of the contribution from intensifying government spending through record fiscal deficits, took its toll on the consumers!

The statement signified a stunning implicit admission of the government’s ravaging of the consumer’s purchasing power!

In the meantime, the real growth rate of capital formation slowed to 16.7% in the 3Q from 21.4% in the 2Q.

Construction (14.8% in 2Q and 13.6% in 2Q) boosted fixed capital (16.5% and 21.2%) while the other major component durable equipment (17.5% and 28.2%) decelerated substantially. Growth of all classes of durables softened markedly, in particular, specialized machineries (14.6% and 34.1%), general industrial equipment (9.4% and 17.3%), transport equipment (23.7% and 33.9%) and miscellaneous equipment (1.6% and 18%). Air transport (+287% and 20.7%), probably from PAL’srefleeting, and aircon & refrigeration (23.% and 18.4%) were the only major components that bolstered durables materially.

The slack in 3Q capital expenditures bodes ill for FUTURE GDP. Up to what extent has price instability spurred the reduction in capital expenditures?

To consider, portions of durable expenditures are from the government or influenced by them, e.g. Road vehicles, agricultural and construction machineries and etc.

Its slowdown may imply that “build, build and build” have consumed the budgets of other government expenditures.

What has boosted expenditure GDP has been merchandise trade which improvement for the quarter partly offset declines in consumer and fixed capital.

Export growth jumped 14.3% in the 3Q from 12.6% in the previous quarter while imports sizzled at 18.9% from 18.5%, respectively.  

The outgrowth in imports over exports has contributed both to record trade and balance of payment deficits.

So from the expenditure side, government spending, construction and external trade were the principal growth factors that contributed to the 3Q GDP. Aside from direct spending, construction and imports are activities connected with the government.

Industry GDP: Vibrant Government Sectors as Race to Build Supply Industries Struggle

The obverse side of consumption is production. Consumption can only occur when there is production.

And that is what industry origin GDP is all about.

Growth has been uneven for its main segments.

 

Figure 3

The service sector crept higher 6.9% in the 3Q from 6.8% in 2Q. The industrial sector dropped to 6.2% from 6.5%. The agricultural sector contracted -.4% from .3%.

In the industry sector, construction real GDP accelerated 16.1% in 3Q from 14.1% in 2Q while utilities (electricity, gas andwater) also recorded strong growth of 5.0% as against 3.7% in the 2Q. Both these sectors are driven by or influenced by the government.

Construction activities may have been dominated by “build, build and build”

Public construction GDP surged 25.4% in 3Q as against 21% in 2Q while private sector construction GDP jumped 14.8% from 13.6% over the same period. Since many build, build and build projects have Private Public Partnership (PPP) arrangements, it isn’t clear whether private construction GDP incorporates such activities or not. 

One thing is clear. There will be no slowing down of Build, build and build. Neither the weak peso nor rocketing debt levels will stymie its advance.

From the Inquirer (November 8, 2018): “We haven’t made a decision to slow down on the ‘Build, Build, Build.’ Even with the suspension of the [fuel] excise tax in 2019, we consider the ‘Build, Build, Build’ as a priority program. And so, as we said earlier, we are going to follow this hierarchy of essentiality. The least essential will be first cut, and the infrastructure program will be among the high-priority programs,” Socioeconomic Planning Secretary and National Economic and Development Authority (Neda) chief Ernesto M. Pernia told reporters Thursday.

This economic official blindly believes in free lunches! They are pushing the nation to the brink of a fiscal crisis!

 

Figure 4

The government or government influenced sectors also boosted the service sector, in particular, public administration and defense (17.8% in 3Q and 15% in 2Q), financial intermediation (7.6% and 7.6%), education (13.4% and 11.5%) and sewerage (5.4% and 5.6%). Including construction, these sectors comprise 23.34% share of the 3Q real GDP.

Where the government spent, it picked the winners. Where the government intervened by proscribing economic activities, it picked losers.

So the war on Boracay has resulted to Hotel and Restaurant GDP of 3.4% falling to its lowest level since 2015! This estimate measures the direct impact from such sweeping and draconian usurpation of property rights.

Of course, demand and supply chains attached to Boracay were also hit. Thus, the ripples from the war on Boracay may have spread to many sectors of the economy. The Boracay closure may have affected partly the ongoing liquidity strains in the banking system.  Statisticians parading themselves as economists won’t get this.

On the other hand, only real estate (5.3% in 3Q, 4.3% in 2Q) registered an improvement among the sectors with the most significant share of the GDP. Trade (5.6%, 6.2%) and Manufacturing (4.0%, 5.5%) GDP were down. These sectors account for 37.42% share of the real GDP, the largest since 1998

 

Figure 5

The deterioration in consumer spending GDP trend has become a significant drag on Trade and real estate GDP. It is a matter of time before any short-term boost from the recent tax stimulus withers away and reveals itself with a resurgence in vacancies in the race to build supply industries financed heavily by debt.

In closing, the record fiscal deficit has impacted, not only in the increases of the general price level but also the distribution of economic activities favoring government and government-affiliated sectors. It also borrows money from the future to fund present activities in the hope that returns will be higher than the carrying cost of such deficit spending. And public borrowing draws away resources from the private sector

Through the crowding out phenomenon, 3Q GDP confirms further the ongoing transition to a neo-socialist state.

October CPI Still at 6.7% as Core Inflation Jumps, Education CPI in Deflation! Will the BSP Hike Anew?

Prosperity, built on debt, inflation, and false government promises, is illusionary and can disappear quickly. It will be necessary that the people learn, or relearn, that debt is not wealth, paper is not money, free stuff is not justice, war is not peace, and government coercion is not liberty. Signs of social chaos are readily apparent and are a predictable consequence of the economic distortions created by the excesses of the QE bubble—Ron Paul

In this issue

October CPI Still at 6.7% as Core Inflation Jumps, Education CPI in Deflation! Will the BSP Hike Anew?

-Food CPI Stalls as Core Inflation Ramps Headline CPI to 6.7%

-As Prices Rage Elsewhere, Education CPI in Four Straight Months of Deflation! Why Price Indices Mislead

-Another Anomaly: Despite TRAIN, Alcoholic Beverage and Tobacco CPI Below 2013

-Why Does the Government Panic Over 6.7% CPI? Will the BSP Raise Rates Anew?

October CPI Still at 6.7% as Core Inflation Jumps, Education CPI in Deflation! Will the BSP Hike Anew?

Food CPI Stalls as Core Inflation Ramps Headline CPI to 6.7%

Last week, the National Government’s PSA and the Bangko Sentral ng Pilipinas reported on October’s CPI as unchanged at 6.7% from a month ago.

The draconian measures undertaken by the National Government to suppress prices, particularly food prices, had done little contain the statistical inflation.

Food CPI did back off slightly to 9.43% in October from 9.72% a month ago. But its loss had been neutralized by increases in non-food and non-energy CPI. (figure 1 upper window)

Figure 1

International oil prices can't justify the stubborn October CPI. Measured from the US West Texas Intermediate benchmark, WTI prices have dropped to $65 per bbl level. It fell below $60 last Friday. (figure 1 lower window)

Core inflation jumped to 4.9% in October from 4.7% a month ago, a multi-year high.

Food accounts for 35.46% or the second largest share of the CPI basket while non-food which includes clothing, household utilities, health, transport, recreation, education, and restaurant, has the largest with a 60.08% share. And the residual 1.58% share consists of alcoholic beverages and tobacco

 

Figure 2

Two of the three significant components of the CPI continued to streak higher.

Housing, water, electricity, gas and other fuels, which carried a 22.04% share weight, advanced to 4.76% but was down from its peak of 5.6% in June.

The second and third most significant component of the non-food CPI, the restaurant and miscellaneous goods and the transport, with a weighting share of 12.59% and 8.06% respectively, did most of the marginal lifting of the headline CPI. 

Both segments reached its highest level since at least 2013.  Restaurant CPI jumped 4.19% in October from 4.0% in September while Transport CPI vaulted 8.75% from 7.96% a month ago.

While restaurant CPI may lag the food and beverage CPI, transport CPI may reflect on the distortions from excise taxes and other mandated increases rather than from international oil prices.

The most recent mandated fare hikes on public transportation are likely to add these pressures. Power rates have also been slated rise.

As Prices Rage Elsewhere, Education CPI in Four Straight Months of Deflation! Why Price Indices Mislead

Of course, the statistical economy is different from the real economy.

Proof? 

 

Figure 3

Take a look at the education CPI. (figure 3 upper window)

Education CPI has been in “deflation” four straight months! How can that be? With prices raging almost everywhere, have spending on education been really down?  

The Department of Education approved a 7% increase in tuition fees of private school last July. That’s no sign of deflation. And that’s just tuition fees. How about spending on uniforms, books, notebooks, and pens? For children schooled in private institutions, parents would see such negative numbers as incredibly unrealistic!

And how about the spending for construction, repair, improvements, logistics and others on educational institutions? (I know CPI is for households/consumers)

Demand or the lack of it is unlikely a factor for such CPI deflation; education GDP was one of the sectoral outperformers in the 3Q!  Besides, bank lending to the sector has been robust since Mr. Duterte assumed office. (figure 3, lower window)

So is excess supply, given the current state of education. 

The likely explanation is increased public subsidies to the households on education. Or government absorbed the price increases through its deficit spending. And the consequent effects from such subsidies on prices have been dispersed unevenly to many parts of the economy.

Since there are more students in public school (84.5%) than in the private sector (14.9%), the deflation in education CPI probably means free lunches drowned the spending costs by students in the private sector.

And if private sector education costs would reflect on the CPI, the headline number should be materially higher. Thus, the education CPI misleads.

The statistical economy is hardly reflective of actual conditions. They are supposed to be estimates and not facts for people and policymakers to fixate on.

Aggregation of prices barely resonates with reality from the individual’s perspective. And the whole cannot be the some of its distinctive and atomistic parts.

In lambasting his peers about the dogmatic embrace of inflation targeting, former US Federal Reserve Chairman Paul Volcker recently wrote,

“No price index can capture, down to a tenth or a quarter of a percent, the real change in consumer prices. The variety of goods and services, the shifts in demand, the subtle changes in pricing and quality are too complex to calculate precisely from month to month or year to year. Moreover, as an economy grows or slows, there is a tendency for prices to change, a little more up in periods of economic expansion, maybe a little down as the economy slows or recedes, but not sideways year after year.

Another Anomaly: Despite TRAIN, Alcoholic Beverage and Tobacco CPI Below 2013

There’s another striking oddity in the CPI.

 

Figure 4

And that’s the “alcoholic beverages and tobacco” component.

Despite its recent surge partly due to the recently implemented excise taxes of TRAIN, its CPI remains lower fantastically compared to 2013. Aside from the Sin Tax Law, 2013’s alcoholic beverage and tobacco CPI surge reverberated with M3 growth of 30%+++. (figure 4 upper window)

With excise taxes from TRAIN 1.0 and the Sin Tax Reform Law of 2012 programmed for another round of increases in 2019, the segment's CPI should either see further upside moves or remain elevated in the face of an emergent slack in demand. 

Why Does the Government Panic Over 6.7% CPI? Will the BSP Raise Rates Anew?

It’s truly a complex and fascinating world.

A CPI of 6.7% remains significantly lower than the 60-year historical average of 8.4%, but why would the government succumb to popular demand and impose price controls (including prosecuting traders for alleged supply and price manipulations), andincreases in minimum wages?  

Of course, the CPI level then has been vastly different from today. Seen from the context of the USD php, sixty years back the USD php was 2, last Friday it was 52.97. But haven’t income been growing enough, as popularly held, to mitigate their impact?

And the government have been panicking over 6.7%?!

There have been more calls for the BSP to raise rates!! Will the BSP submit to such pressures in their coming meeting on the 15th?

It’s either this number has been severely understated or that the ballyhooed boom is a mirage masked by credit inflation.

Of course, the CPI is influenced by the supply of, and demand of money relative to goods and services.

While declining rate in bank lending and money supply may indicate a withdrawal in the means to finance spending, increases in the public’s time preference mean reduced demand to hold money relative to goods. Or when people expect a sustained pace of price increases, they chase prices.

October’s elevated CPI probably indicates the latter.

Also, it appears that on the demand side, the BSP’s record financing of the unparalleled deficit spending remains the more dominant force than the growing slack in private sector demand as expressed by declines in bank lending, and consequently, money supply growth. (figure 4, middle window)

However, yields of Philippine Treasuries may have been confirming my inflation expectations. With yields down in the mid- to the long-end, this may signal an easing of inflation. But the dilemma is on the yields of T-bills, which continue to ascend indicating deepening liquidity constraints! The result from this asymmetry is to flatten the curve. (figure 4 lower window)

Finally, because inflation is more than just about statistics, not only will its change affect business, economic and financial activities, but also impact the socio-political sphere as well.

A magnified political turmoil should accompany a bursting bubble.