WB growth forecast may be optimistic
Credit to Author: BEN KRITZ, TMT| Date: Wed, 03 Apr 2019 18:04:37 +0000
THE World Bank (WB) created a bit of a stir this week by announcing it had reduced its gross domestic product (GDP) growth forecasts for the Philippines. Due to a number of unanticipated challenges, the multinational lender said, it revised its forecast for 2019 downward from 6.5 to 6.4 percent and lowered its forecast for 2020 and 2021 from 6.6 to 6.5 percent respectively.
This is not the sort of news the government likes to hear, so I expect that by the time this column is in print, Sal Panelo will have already been out to offer an incoherent explanation of the WB’s misunderstanding of the Philippines’ economic climate, which is really the envy of the civilized world.
If the new WB forecasts, at least for 2019, are off the mark at all, however, it is likely that they are too optimistic.
The WB highlighted the ongoing delay in enacting the 2019 budget, expected damage and price inflation resulting from the El Nino drought and the general global economic slowdown as the main reasons for revising its forecasts downward. The WB offered a rather pointed suggestion that passing tax reform measures that have been stalled in Congress since last year will help keep the economy on track, and added that the government should also exercise a bit forward thinking by investing more in public health and education.
Economic forecasts, particularly those dealing with figures like GDP that are almost too broad to be meaningful should be viewed through a blurry lens. The specific forecasts are not that significant; the difference between 6.4 and 6.5 percent GDP growth is practically undetectable even at the largest macroeconomic scales. The qualitative prediction, however, does tell us something: Economic growth will be slightly less than expected for at least the next three years.
There are reasons to conclude that economic growth will slow down by much more than a “slight” amount. That was evidently the feeling of the local stock market; on a day when objectively positive cues (an increase in China’s manufacturing index and details of progress in US-China trade negotiations) pushed every regional market higher, the Philippine Stock Exchange index (PSEi) stood out as the only one to close lower.
Over the past 10 years, growth forecasts from the WB have tended to overshoot reality by two-tenths to as much as half a percentage point. Some of the excess of caution is likely intentional; the WB’s business as a lender is not served by discouraging economic activity in an emerging or developing economy. Like any multilateral entity, the WB’s ability to operate relies on sufferance to some extent, and so the views it feels it needs to share are presented in as positive way as possible. It is also affected by large-institution inertia. An economic report presented this week is based on data gathered weeks or months ago; watering down the results to small changes in one direction or the other is a rough but easy way to compensate for changes that occur over the time it takes to produce an economic analysis.
The WB forecast noted the impact of both the budget delay and the El Nino, but downplayed both. The forecast gives the impression that risks to growth from the delayed 2019 budget will be eliminated once it is finally enacted, but that is not the case. If the 2019 budget was delivered into the hands of the Executive branch today, it will still be three to four months before it would begin to be reflected in action. Because of the cash-based system the budget puts in place, the loss of two quarters of the year means that only about half of what the government planned for 2019 can be initiated. The president’s snap announcement this week that all existing government contracts will be reviewed will only make it harder for agencies to catch up to their 2019 programs. Growth coming from government spending at all this year is a faint hope, if not an entirely vain one.
As for the El Nino, the WB seems to have joined everyone else in grossly underestimating its impact. So far the severity of the periodic climate phenomenon has caused has been much worse than expected. Agriculture losses by now have exceeded P5 billion, and water shortages, albeit aggravated by stupidity and bad planning, are going to become more frequent and more severe. The WB forecast acknowledged the possibility of higher food price inflation due to El Niño, but not the loss of productivity across the rest of the economy.
The WB also does not account for the likelihood – the near certainty, if the history of recent El Niño events is at all a reliable guide – of one or more large-scale natural disasters due to typhoons.
All of that means this year’s GDP growth will be closer to 6.0 percent than 6.5 percent. The usual response to that is, “6.0 growth is still pretty good.” That is true on a simple level, but economic history shows that countries that can claim real expansion (China is an excellent example, as is India) have had extended periods of growth of 8.0-10 percent. The Philippines is not even close to having that potential yet, and given the challenges it is currently facing, is not going to come close to achieving it any time soon.
Email:ben.kritz@manilatimes.net
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