If we may speculate, and given the latest turn of events, many of the economic and financial assessments we hear in boardrooms must now be shifting to one of “fading recession and disinflation bets, resumption of BSP hike expectations… supply pressures keep rates buoyed.” This was captured in one of the board meetings we attended recently. It was an excellent presentation entitled “Shake, Rattle, Rattle Some More,” in obvious allusion to the more volatile, more uncertain global economy. The local equities market has been mimicking this in its roller coaster ride.
Repudiated by the likes of US Treasury Secretary Janet Yellen and former US Treasury Secretary Larry Summers, the US downgrade by Fitch did not help any. A knee-jerk reaction sent the 10-year US treasuries near the highs during the Global Financial Crisis, exacerbated by the expected reaction of the US Fed to stronger than expected US growth and labor market data. As US Fed Chairman Jim Powell declared near the end of last month: “Given the resilience of the economy recently, they (economists, statisticians, and other experts in the US Fed) are no longer forecasting a recession.”
The fast-moving oil market also mirrored the projected rosier outlook on the US economy. There seems to be a good convergence of initial forecasts of growth from different quarters. For instance, the US Energy Information Administration is projecting GDP growth of 1.9% this year while the US’ Bureau of Economic Analysis is bullish given the 2% and 2.4% first and second quarter GDP growth rates, respectively.
Thus, oil prices have started to climb. Although US oil production is expected to expand by 850,000 barrels per day (bpd) to 12.76 million bpd, this may not be enough to offset the cutback in Saudi Arabia’s oil output against the backdrop of steady global demand. China’s oil trade fell, with both exports and imports of oil down by double digits as China’s recovery has proved weaker than expected with consumer prices swinging to deflation last month. The so-called decoupling of China from the US and the West is now beginning to be felt in terms of lower foreign investment in and trade with China.
All of this could have negative spillovers for the rest of the region, namely, on aggregate demand, external trade and investment, exchange rate and inflation.
How is the Philippine economy performing?
While the economic managers were presenting the macroeconomic assumptions to the House of Representatives as members of the Development Budget Coordination Committee (DBCC) yesterday, the Philippine Statistics Authority (PSA) reported a modest output expansion of 4.3% for the 2nd quarter 2023 and with 6.4% growth in the 1st quarter 2023, the first half growth performance stood at 5.3%. First half real GDP last year was at a high 7.8%.
One can observe from the PSA chart that quarterly growth has been moderating since the 1st quarter of 2022. For the 2nd quarter alone, government spending and gross capital formation actually declined. Based on seasonally adjusted national income accounts, GDP recorded a quarter-on-quarter decline of 0.9%. Transportation and storage, manufacturing, and financial and insurance activities largely accounted for the retreat. (See Figure 1.)
This is where many economists and forecasters are coming from when they argue that the Bangko Sentral ng Pilipinas’ forceful, to use the word of Governor Eli Remolona during the congressional presentation, tightening of monetary policy might already be hurting the economy.
After all, it has been observed that year-on-year monthly inflation has shown some easing from the beginning of the year (See Figure 2).
Yet the Bangko Sentral ng Pilipinas (BSP) was correct in saying that any talk about an early cutting of the central bank’s key interest rate is “premature.” Further monetary tightening is still on the table for the Philippines; we are not out of the woods yet. While the easing trend appears obvious, year-to-date headline inflation of 6.8% remains way above the 2-4% inflation target. Core inflation continues to be sticky downwards. The BSP has good reason to remain cautious because upside risks continue to dominate, including the approved higher wages in all the 17 regions averaging 13%, the impact of El Niño on the food supply, and the potential depreciation of the peso should the US Fed decide to resume tightening as the current consensus appears to suggest.
As the BSP governor disclosed to Bloomberg in Canada, “We’re not thinking about whether to cut or not to cut.”
If we may add, global oil prices are beginning to rise with firm demand and lower supply. US economic resilience could also lift the lid on commodity prices. The latest export ban in some Asian capitals on rice could dash the hope of bringing down rice prices to P20 per kilo. With farm output dropping in the 2nd quarter, this is hardly good news for inflation in the next few months.
This set of facts and risks challenge the BSP’s current inflation forecasts of 5.4% for 2023, 2.9% for 2024, and 3.2% in 2025. With the lower GDP outturn for the 2nd quarter 2023, we expect a renewal of the call for the BSP to consider an early lifting of the policy rate after a 425-basis-point increase over a one-year period.
Some may also invoke the latest pronouncement of Nobel laureate Paul Krugman who said that the US Fed should not obsess over getting inflation back down to its target of 2%. After all, he said, the national conversation has started to veer away from it, as inspired by the steady cooling of the US economy. Inflation plummeted from a 41-year peak above 9% to 3% in June. Krugman’s key point is that the inflation target “was arbitrary to begin with.” For him, the more important consideration is to encourage people to cease worrying too much about inflation. Keeping the rates high could push the US economy into recession.
In the US, it may be true that the public seems to have gone slow on inflation talk. Based on the 12-week moving average of Google searches for “inflation,” it has been declining since August 2022. For Krugman, 3% rather than 2% is good enough lest the Fed “put the economy through the wringer.”
The Nobel laureate could be right in his concern about inflation but so far, talk about recession is also receding based on the latest data. The IMF’s World Economic Outlook (WEO) projected global output to fall from 3.4% in 2022 to 3% in both 2023 and 2024. But its forecast of 1.8% and 1% for the US this year and the next are not quite recessionary in exchange for a more decisive reduction in inflation. Inflation in itself could help drive the US economy to retreat following its debilitating impact on personal consumption.
Likewise in the case of the Philippines, we may not be in a Goldilocks situation based on a high actual inflation average of 6.8% and 5.4% forecast for the whole year and a modest 5.3% real GDP average for the first half of 2023 against the whole year target of 6-7%. But it is undeniable that the BSP retains the flexibility to keep a cautious stance on monetary policy. Talk about inflation has never stopped. The latest Pulse Asia survey for June 2023 indicates respondents rating “controlling inflation” as the No. 1 most urgent concern. Growth of 5.3%, with all the risks and headwinds, is resilient enough to give space to depress inflation.
As to economic growth, it would be wise for the rest of government to take up any slack by ensuring that the level of public spending be sustained each year through the judicious deployment of the P5.768-trillion budget which is more than a fifth of the country’s gross domestic product. Let nothing divert the state funds away from ensuring food security, improving infrastructure, enhancing education and skills development, strengthening health and social protection, achieving fiscal sustainability, lasting peace, and preparing for climate change. Fighting corruption also entails expense and nothing should be spared to attain it.
That is the only way by which partnership with business and investment could be inspired to provide the platform for higher and more meaningful economic growth.
Diwa C. Guinigundo is the former deputy governor for the Monetary and Economics Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. In 2001-2003, he was alternate executive director at the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.