Gross Domestic Product: three words that can decide elections, influence political decisions, and determine whether a country can keep borrowing or will be thrown into recession—Diana Coyle
In this issue
4Q and 2021 GDP: Consumer "Revenge" Spending Boom in a Metaverse Economy! Reality Check: Revenge Public Spending, Debt and BSP Interventions
I. International Labour Organization (ILO): Philippine Official Unemployment Numbers Undercounted!
II. IIF on Emerging Market Disinvestment Cycle: the Philippines Suffered Biggest Drop in Investments in 4Q 2019 to 3Q 2021!
III. Despite December Bi-Directional Spikes, Q4 2021 Mobility Still Below Pre-Pandemic Thresholds
IV. National Government’s Implicit Confession: Inequality from Wealth Effect Policies; Q4 Household Spending Zooms to Pre-Pandemic Record Levels!
V. What did Consumers Use to Finance their Spending Orgy? Why are Consumer Prices Down?
VI. The Shift to E-Commerce: Creative Destruction has just Begun
VII. Reality Check: Record "Revenge" Public Spending Plus Revenge BSP Interventions Translate to Lower Consumption Spending!
4Q and 2021 GDP: Consumer "Revenge" Spending Boom in a Metaverse Economy! Reality Check: Revenge Public Spending, Debt and BSP Interventions
I. International Labour Organization (ILO): Philippine Official Unemployment Numbers Undercounted!
From the Businessworld, January 18 (bold mine): THE International Labour Organization (ILO) projected Philippine unemployment numbers at 1.1 million in 2022, about 10% higher than pre-pandemic levels, but warned that unemployment data may undercount the extent to which people exited the work force during the public health crisis. The coronavirus disease 2019 (COVID-19) pandemic triggered “a large exit from the labor force, which does not count as unemployed,” according to Khalid Hassan, director of the ILO Philippine country office. In an e-mail on Tuesday, Mr. Khalid added: “The employment impact is much larger than what unemployment shows.” … … Kilusang Mayo Uno Chairman Elmer Labog called the ILO projection “actually a quite generous estimate… because the reality on the ground is very different.” In an e-mail to BusinessWorld, Mr. Labog, a Senate candidate, said employment data do not reflect many who are either unpaid for their work or self-employed. “This is not a good sign that the economy is recovering despite what the Duterte administration says. There is no real job creation. People are just making do with what employment opportunities are there — and this is not a way to make a decent living,” Mr. Labog said.
This author is not alone in suspecting the embellishment of labor conditions presented by authorities.
The reason? Well, this may be about the GDP.
As stated last August 2021…
Though government numbers are suspect, affirming the accuracy of the numbers from SWS is also not possible.
Official unemployment rates supposedly improved to around 7.7% in May and June. Even if there has been an improvement, the chasm between SWS and the official numbers should remain substantial.
In any event, because authorities will use these figures for their estimates, 2Q GDP numbers are suspect. And that's from the labor aspect only.
This Week’s 2Q GDP Announcement: Statistical Gains from the Low-Base Effect August 9, 2022
The GDP is a political number requiring a politically convenient narrative centering on a theme. That magic word is REOPENING.
Reopening spurs employment, thus, spending, so it is held.
When the 3Q GDP 2021 was announced, we asked…
So should the public accept the narrative that the more unemployment, the greater the spending growth?
The 3Q GDP 7.1% Ramp: A Consumer Boom in the Metaverse Economy; Mistaking L-Shaped Recoveries with a Low-Base Effect Boom, Public Spending as Key Driver November 14, 2021
But the glaring divergences between the Q3 GDP and Q3 financial performances of listed retail and real estate companies only reinforced our suspicions.
Q3 2021 Retail GDP Boom? Peso Sales of SM, Robinsons Retail, Puregold, 7/11, and SSI Says No! November 22, 2021
Stagnation is Growth! As Q3 GDP Spiked, ALI, SMPH and RLC’s 3Q Real Estate Sales Languished! Debt Massively Outpaced Revenue and Income Growth November 28, 2021
While authorities may arbitrarily inflate the growth rate, they can do so only for a while.
II. IIF on Emerging Market Disinvestment Cycle: the Philippines Suffered Biggest Drop in Investments in 4Q 2019 to 3Q 2021!
Figure 1
Before proceeding with the so-called "boom" in the 2021 consumer metaverse economy, this outlook from the Institute of International Finance (IIF) provides substance to the claim why "there is no real job creation."
From the Inquirer.net, January 28 (bold mine): The Washington-based Institute of International Finance (IIF) in a Jan. 27 report said emerging markets like the Philippines, Colombia, Malaysia and South Africa were currently in a “disinvestment cycle” or a period of decline in fixed private capital formation, which “runs the risk of transforming the COVID-19 shock into a medium-term drag on growth.” Among the 21 advanced economies and 23 emerging markets covered by the IIF report, the Philippines had the biggest drop—nearly 30 percent—in real gross fixed private capital formation between the pre-pandemic fourth-quarter of 2019 and the third quarter of 2021.
The IIF is an exclusive association or trade group for the global financial services industry with 450 firms from more than 70 countries, including commercial and investment banks, asset managers, insurance companies, sovereign wealth funds, hedge funds, central banks, and development banks.
The plunge in capital formation is nothing to sneeze at. (Figure 1, topmost pane)
Such a massive scale of disinvestment defies the idea of an economic boom!
As the dean of Austrian Economics Murray Rothbard wrote,
improved standards of living come to the public from the fruits of capital investment. Increased productivity tends to lower prices (and costs) and thereby distribute the fruits of free enterprise to all the public, raising the standard of living of all consumers.
Murray N. Rothbard, What Has Government Done to Our Money? Mises.org
Disinvestment extrapolates not just reduced jobs and wages; more importantly, it means diminished productivity!
And since capital needs to be maintained, replenished, and recalibrated (to adjust for changes in consumer demand), disinvestment also implies capital consumption!
How can there be a consumption boom without investments?
Stunning!
III. Despite December Bi-Directional Spikes, Q4 2021 Mobility Still Below Pre-Pandemic Thresholds
Next, moving to the alleged consumer boom in the metaverse economy…
From the Inquirer.net, January 27: “Mostly stuck at home for nearly two years, many well-off Filipino consumers embarked on what economists called “revenge spending” before 2021 ended, driving economic growth to another better-than-expected 7.7 percent year-on-year in the fourth quarter of last year. The surge in consumer demand when more economic sectors were reopened late last year allowed gross domestic product (GDP) — the sum of goods and services produced in the country — to grow at an average 5.6 percent in 2021, slightly above the government’s 5 to 5.5 percent target.”
First off, a significant and sustained reopening of the economy remains wanting.
Except for grocery and pharmaceutical activities, the pre-pandemic thresholds in parks and retail & recreational areas occurred only in December, based on Google's mobility data charted by Our World in Data. But the gains and declines were sharply volatile. (Figure 1, middle pane)
In the meantime, transit and workplace mobility remained below it.
From the perspective of Apple’s mobility data, driving and walking activities popped beyond the January 2020 pre-pandemic threshold for a short period in December. Transit mobility, however, even in January 2022, remained depressed. (Figure 1, lowest window)
Both data also imply that only the population with cars had the privilege of gallivanting or gaining external access.
Nonetheless, neither freedom of movement automatically equate to spending surges nor economic recovery. Many other factors are involved.
IV. National Government’s Implicit Confession: Inequality from Wealth Effect Policies; Q4 Household Spending Zooms to Pre-Pandemic Record Levels!
Next, local economic authorities admit to the bias for the "trickle-down" from their "wealth effect" policies.
From their viewpoint, the "reopening" spurred the elites to indulge in "revenge spending".
Authorities appear to be mistakenly mimicking a different model for the local environment for its growth narrative.
In the US, consumers benefited massively from government handouts or stimulus, which aside from wage growth and increased use of credit, fueled a spending orgy, hence, the "revenge spending ".
Unlike the US, the dole out from the central government to the population was sparse.
Instead, government stimulus focused on boosting fiscal spending and rescuing the banking system, benefiting the elites primarily.
The direction of intervention was consistent with its entrenched pre-pandemic policies. As previously noted
So instead of promoting entrepreneurship and competition through a market economy, entrenched economic and financial policies essentially advance the interests of the elites through subtle protectionism.
2022: The Diminishing Returns of Trickle-Down Rescue Policies and The Illusion of a Political Superhero January 9, 2022
Furthermore, the public has been made to believe that the "revenge spending" of the elites is enough to generate real economic growth.
But to produce such an impressive degree of growth from the moneyed class means that the scale of spending vastly exceeded the losses or deficiency incurred by the lower classes!
Instead of reality, the GDP data exhibits massive skewness or distortions!
Let us proceed to the data.
Figure 2
Q4 real household consumption GDP jumped 7.5%, its fastest growth since Q2 2016!
The most prominent features of the data are the aggregates, nonetheless.
While the cumulative nominal HEADLINE household spending nearly topped the Q4 2019 record, with the growth rate at 10.4%, the aggregate current peso-based household spending also set a NEW quarterly record! (Figure 2, topmost and second to the highest pane)
From the supply-side, Q4 "revenge spending" was manifested by an ALL-TIME HIGH by the real retail and wholesale trade GDP!!! The growth rate was at 7.4%. (Figure 2, second to the lowest pane)
Incredible!
So you see, the massive vacancies in the shopping malls signify only our optical illusions.
From the GDP perspective, even brick-and-mortar retail outlets were bristling with visitors who engaged in frenetic transactions! The moneyed class indulged in an unprecedented panic buying in Q4!
Perhaps, news reports that we read about retail operations downsizing or shutting down represent "misinformation"!
Needless to say, the GDP is further proof exhibiting how the establishment presents economics as nothing more than statistics.
Interestingly, commercial real estate (CRE), a second-order beneficiary from this alleged revenge spending boost, appears to have lagged the retail sector. Has the high vacancies rate in malls vanished in Q4?
The share of property GDP to the total dropped to an all-time low in Q4 2021 and (annual) 2021! (Figure 2, lowest pane) CRE is a constituent of the real estate GDP.
V. What did Consumers Use to Finance their Spending Orgy? Why are Consumer Prices Down?
But let us follow the money trail for confirmation.
How then did the wealthy class finance the record spending?
Did corporate and wage earnings boom in the period? We shall soon find out.
Or how did consumers finance their alleged spending orgies? Through cash, savings or credit?
Figure 3
Here are some relevant data: (Figure 3, upmost pane)
M2 Savings growth peaked in March 2021 then started to taper.
The growth of cash in circulation, which bounced off the lows of May 2021, appears to have climaxed in October 2021.
The growth of the M3 liquidity benchmark has resonated with its principal component, cash.
And finally, despite posting marginal growth in credit card usage over the last two months, consumer credit remained contractionary in the first two months of Q4.
In that respect, though bank liquidity and credit conditions improved from the immediate past, these hardly supported the notion of a consumer spending spree.
Then there are prices.
Through revealed or demonstrated preference, prices function as a measure of consumer activities.
Self-evidently, if consumers were in a panic buying mode, why has the CPI been slowing during the period?
As a caveat, this inference assumes the accuracy of the statistical measure of changes in consumer prices.
Or, if the agriculture GDP barely grew, shouldn't "revenge spending" have pushed the CPI higher? (Figure 3, middle window)
Have consumers skipped food from their spending bacchanalia?
Neither has the restaurant CPI nor the core CPI also functioned as the lightning rod for consumer spending frenzies. (Figure 3, lowest window)
Instead, the CPI has resonated with the seeming inflection of liquidity growth conditions. Put bluntly, a lack of demand may be the reality.
Or perhaps, has the food-skewed CPI deliberately penciled lower (via the PCE) to boost the GDP?
As proof of how politically sensitive the CPI is, for publicizing a 19-year high CPI print in 2021, Turkey's leadership booted out its chief statistician last week!
VI. The Shift to E-Commerce: Creative Destruction has just Begun
Let us move to another channel for the so-called spending orgy: e-Commerce.
The Philippine Statistics Authority (PSA) imputes sales from e-Commerce to the Information and communication sector.
Figure 4
The fuss over the outgrowth from the purported shift of the trading platform of the retail industry to the digital sphere seems unsubstantiated even from the GDP data.
While the industry may benefit from a health policy-mandated transformation, it would be a mistake to deduce growth from substitution as value-added or productivity-driven.
The information and communication sector grew 8.4% in Q4, which dragged the annual GDP of the sector to 9.1%, yet its fastest rate since 2007. The aggregate nominal GDP hit a record in Q4. (Figure 4, topmost pane)
However, its % share of the overall GDP remained at 3.3% in 2021. So while its share of the annual GDP bounced substantially in 2020, it plateaued or stayed flat in 2021. (Figure 4, middle pane)
In early August, here is my take on the Telcos:
For telcos, the forced adaptation from brick and mortar business models to remote work and telecommuting during the pandemic boosted their revenues.
However, as a service platform, its growth prospects remain anchored on the economic and financial conditions of households and businesses.
In any event, the sector’s outperformance is temporary and should realign eventually with the growth dynamics of its clients/consumers as socio-economic conditions normalize.
PSEi 30: Surging Prices as Criteria to Membership: ACEN and CNVRG in, EMP and DMC out August 8, 2021
Of course, the shift to the digital space signifies one of the principal dynamics that transformed brick and mortar into a "retail apocalypse" in the US, forcing the closures of a wave of shopping malls.
The lesson is that the current developments have only reinforced this transformational trend. The landfall from this massive force of creative destruction in the domestic setting has just begun.
VII. Reality Check: Record "Revenge" Public Spending Plus Revenge BSP Interventions Translate to Lower Consumption Spending!
The most intriguing part of the GDP tall tale is to portray the consumer as the critical driver of the economy.
Even if we take this charade at its face value, one quarter does not a trend make.
"Revenge spending" by consumers seems to have helped the statistical economy in Q4, but the star of 2021 remains the GOVERNMENT!
In 2021, real household consumption GDP grew by 4.2% while public spending jumped 7.0%.
At 15.3%, the share of public spending to the total GDP hit another all-time high in 2021! And this excludes the public sector's construction activities. (Figure 4, lowest pane)
Meanwhile, after a boost in 2020, the share of household spending to the National GDP resumed its decline in 2021!
Yet, the record share of public spending to the GDP did not emerge from a void. It represented an uptrend, which momentum picked up speed since 2016!
Figure 5
And since public spending and its attendant deficit require financing, the public sector engaged in "revenge borrowing" while the BSP undertook "revenge debt monetization" to rescue the financial system! (Figure 5, upmost and middle panes)
Since political transfers channeled through direct and indirect taxes finance public expenditures, coming at the expense of the consumers, how is this Q4s dynamic sustainable?
First, the purchasing power of the peso continues to slump! The understated CPI reveals that the peso has lost 22% of purchasing power since 2012, a CAGR rate of -2.72%. (Figure 5, lowest window)
In short, while some segments benefit from invisible transfers from political edicts, consumers are the primary victims of the loss of purchasing power of the peso! Their peso buys them fewer goods and or services!
Next, the shifting or redirection of resources to political consumption from productive usage effectively reduces real economic growth.
Lastly, the underlying costs from the massive buildup of debt to finance such transfers will not only gnaw at productivity and erode purchasing power, but it likewise increases the risks of a financial crisis.
Regardless of economic conditions, system leverage (bank lending and public debt) continues to advance and outperform the economy.
Warned the great Austrian Economist, Ludwig von Mises,
At the bottom of the interventionist argument there is always the idea that the government or the state is an entity outside and above the social process of production, that it owns something which is not derived from taxing its subjects, and that it can spend this mythical something for definite purposes. This is the Santa Claus fable raised by Lord Keynes to the dignity of an economic doctrine and enthusiastically endorsed by all those who expect personal advantage from government spending. As against these popular fallacies there is need to emphasize the truism that a government can spend or invest only what it takes away from its citizens and that its additional spending and investment curtails the citizens' spending and investment to the full extent of its quantity.
Ludwig von Mises, Part Six: The Hampered Market Economy, Chapter XXIX. Restriction of Production, Human Action
So how can these negative-sum activities induce sustained economic progress?
Yours in liberty,
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