‘WHEN the news was released, it was as if Mother Nature herself reacted ominously. Suddenly dark clouds formed, blocking out the sun. Mothers began looking for their children, wanting them in sight. Official government vehicles with heavily tinted windows were seen moving quickly to key government buildings. Television-station newscasters looked at each other, unsure [of] how to tell the story without causing a general panic. The world would never be the same again.”
While the previous paragraph describes the opening scene of a long-forgotten science-fiction movie about an alien invasion, it could also describe the reaction of people in some quarters to the Philippines’s third-quarter economic-growth numbers.
One newspaper headline read: “Disappointing GDP [gross domestic product] growth pummels index.” The story behind it is about the Philippine Stock Exchange composite index falling 1.24 percent. Interestingly enough, while the index was down, the largest company on the exchange—Philippine Long Distance Telephone Co.—was absolutely unchanged in price. Also, only three issues accounted for a large part of the decline.
The GDP growth rate is only one and, in my opinion, not the most important measure of the economy that we should be looking at.
Consider that the Philippines’s total economic output, measured in US dollars, has increased by 36 percent since 2010. Malaysia’s is up by 26 percent, while Thailand’s is 21 percent higher. Vietnam is doing better because of its high foreign investment, but per-capita economic-output growth, measured in purchasing power, is about the same.
There are other factors to consider about the GDP growth.
Seven-percent economic growth is not necessarily desirable for an extended period. While it would be nice to see that kind of growth, as it would certainly help fight the poverty problem, too much economic output achieved too quickly creates a misallocation of resources. That is what those who talk about “bubbles” are worried about.
Another reason economic growth in 2014 is lower than that in 2013 is that the latter created a high base for one to measure from. Furthermore, too much of last year’s growth was fueled by the Bangko Sentral ng Pilipinas pumping too much money into the economy. As a result, not only did we have higher growth in 2013, we also had higher inflation. A cooling-off period is exactly what this economy needs right now.
Another advantage for consumers is that lower economic growth often translates to lower consumer prices, as businesses work to increase sales. The test of this economy’s strength will come during the fourth quarter. As long as we can finish the year with about 5-percent growth, all will be well.
However, don’t be surprised if the fourth-quarter numbers look “bad,” according to the experts. The reason for this is that GDP measures the quantity, not the quality, of economic activity.
Measuring total economic activity also measures waste, not productivity. If you are spending an extra P1,000 a week on gasoline because of heavy traffic, that is more “economic activity,” but you are not producing anything in the extra hour it takes to get home from work.
Capacity-utilization, which is a measure of the maximum possible output of an economy, is slightly higher this year than last year. However, the volume of industrial production is lower, as there has been a fairly strong drop in inventories, even as consumer spending is growing. Either consumers are overly optimistic and businesses are correctly cautious, or the consumers are right and we will see even more spending in the fourth quarter, which will result in a large expansion of production after the first quarter of the year. That is why we will look very closely at the fourth-quarter numbers.
But, perhaps, the most significant economic news in the past week—one that is of critical importance to the Philippine economy—is the global price of crude oil. It is at a four-year low and has the strong potential to go even lower, back to 2009 levels.
Since the Philippines is dependent on oil imports, the price of gasoline can have a more significant effect on our economy than all the government spending. In this regard, the country is going into 2015 in great economic shape.
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Send me an e-mail at mangun@gmail.com. Visit my website at www.mangunonmarkets.com. Follow me on Twitter at @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.