RP economy in 2006: promises and pitfalls

The 6.1 percent GDP growth rate in the fourth quarter that lifted the Philippine economy to a 5.1 percent for entire 2005 seems to have given the idea that the Philippine economy is on the mend. I also hoped so. The best way to look at it, however, is by discerning the economy’s promises as well as its pitfalls.

Let’s figure out the promises for 2006. First—it seems that the farms’ recovery is really on the way given favorable weather. In the last several years, agriculture and fisheries—assuming good weather—has shown to be capable of growing within the 4-6 percent range despite problems related rural infrastructure. Over the years, agricultural and fisheries exports have diversified into new products like mango, tuna and other marine products, seaweeds, and asparagus besides the usual stuff like banana, pineapples, and coconut products. Lower industrial tariffs has enabled the agribusiness sector to have greater access to inputs, biomedics, seeds and planting materials, and packaging materials.

Second—Mining has rebounded and one could assume that this trend will continue given the rising prices of precious metals in the world market. Third—remittances from overseas Filipino workers may continue to fuel high domestic consumption and high and high growth in services particularly telecommunications, banking, and business services. Fourth—it seems that the global economy, according to experts from the World Economic Forum, will remain buoyant throughout 2006, a continuation of the “goldilocks economy” that prevailed in 2005. Because of this, exporters of electronics are already forecasting a 10 percent growth rate in 2006.

What are the pitfalls? First—it seems that personal consumption expenditure (PCE) is showing some danger signs. Remember that PCE accounts for more than 70 percent of the economy. The moment the people starts holding on tight to their wallets, the economy will choke. The signs of people scrimping on their basic necessities are unmistakable as shown by continuing decline in expenditures of beverages; tobacco; fuel, light, and water; household furnishings, and miscellaneous expenditures. It means people are now limiting their spending to the bare essentials like food, clothes, and transportation. Should inflation rates shoot up further owing to the continuing volatility of oil prices and the rise of valued tax rates from 10 to 12 percent, people will probably scrimp some more by cutting on purchases of food and clothes. That will depress personal consumption and slow down the economy.

Second—the expected rebound in construction activities is not a slam dunk case. Not yet anyway. The proliferation of call centers and other outsourcing companies has started to shake up the property markets. Nevertheless, that trend may not translate into more construction activities because of two factors. First, the difficulties in getting skilled workers may slow down the growth of outsourcing business. Second, real estate developers do not expect big-ticket projects in the next two years because of the footloose nature of the business process outsourcing industry. They are here today but could easily be gone tomorrow because of the ease of entry and exit in this business. The trend lately has been towards “build-to-suit” projects where real estate companies would only construct new buildings upon demand and according to the client’s specifications. Most new buildings for outsourcing companies these days are “demountable” types that could be easily constructed and dismantled once the occupants are gone. That trend doesn’t seem to indicate long-term commitments among investors. Also, there seems to be no clear trend towards substantial demand for residential condominiums yet as “experts” (e.g. Leechiu and Associates) continue to warn about a possible “condo glut.”

Third—the project higher public construction is premised on higher government revenue collection arising from the higher VAT rates. VAT, however, is a tax on consumption and coupled with high energy prices, people may yet scrimp (e.g. by buying less, eating out less) such that the government wouldn’t be able to collect substantial amounts.

Fourth—the flipside of the global goldilocks economy is the continuing tightness of the global oil supply. What did those economists from the World Economic Forum told us? That China, Japan, and Germany are going to have it so good economically. That would only means higher consumption of oil, thus making the global crude oil prices even more vulnerable to political shocks.

Which of these scenarios will prevail? My heart necessarily goes for the bright sky scenario. After all it will be ordinary mortals like us who will lose jobs when the economy turns bad. But what do government figures say? Let’s quote from the National Statistical Coordination Board initial report on the leading economic indicators: “After posting consecutive increases during the last two quarters [third and fourth quarters of 2005], the composite leading indicator [a sort of early warning device on the trajectory of the Philippine economy] decreased to 0.018 in the first quarter of 2006 from 0.115 in the fourth quarter of 2005.” That’s not a comforting thought. But you see, statistics and projections by economists are oftentimes wrong. (For a more personal, visceral take on the world, please visit Photographs and Memories).