PH’s moving growth target
Credit to Author: BEN KRITZ, TMT| Date: Sat, 12 Oct 2019 17:21:58 +0000
ON Thursday, the World Bank released its latest “Philippines Economic Update” and revised its gross domestic product (GDP) growth forecast for the country downward from 6.4 percent to 5.8 percent. Just about every credible source — including the government’s own economic managers — has lowered growth forecasts for this year, some more than once, and of course, each change in the outlook is dutifully reported by the business media.
What we do not generally stop to think about is whether there is any practical purpose for doing so. Is there any value in knowing what the GDP growth figure is from an applied perspective? And if so, is there any real validity to forecasts that constantly change?
The short answer is “no” to both questions. Economists can come up with a variety of arguments that GDP growth is a useful indicator, but when one strips away the rhetorical chaff of theory, those arguments all sift down to pretty much the same thing: GDP growth is useful as a broad, qualitative indicator of the health of the economy, a kind of shorthand policy benchmark. If GDP growth meets or exceeds a largely arbitrary expectation, then whatever is occurring in the economy must be largely positive.
GDP growth forecasts, then, are attempts to manage expectations and set benchmarks that will define whether or not the economy is generally “okay” or “not okay” in some future period — the remainder of the year, next year or the year after. For the average consumer or business, the GDP growth rate means almost nothing, because it is too broad. The health of an individual cell may be quite different from the health of the entire body. From that perspective, a GDP growth forecast is even less relevant, and is especially so when the forecast changes regularly.
The reasons why major observers, such as the World Bank, the International Monetary Fund and the Asian Development Bank, have reduced their growth forecasts are speculative, except in one respect. The four-and-a-half-month budget impasse at the beginning of the year had a disastrous impact on the whole economy. Government spending was cut to about 10 percent of its normal level, which had a ripple effect.
Another contributing factor, as Finance Undersecretary Gil Beltran pointed out this week, was the aggressive raising of interest rates by the BSP in the latter part of last year. The BSP hiked its benchmark interest rates by a total of 1.75 percent, which was necessary to rein in decade-high inflation. Raising the interest rates certainly helped to do that by pulling liquidity out of the financial system, but the unavoidable side effect was lower consumption, although the impact was very small compared to the government spending freeze.
The budget impasse is long past and the full 2019 spending program has been available for a couple of months, but forecasters are still looking at it as a negative factor for growth because the absorptive capacity of government agencies to accelerate spending has limits. Thus, lower forecasts express the opinion — probably a mostly correct one, as the Department of Finance also acknowledges the problem — that the government will not be able to quite catch up to where spending should have been by the end of the year.
Other reasons cited include effects of the ongoing US-China trade war, although these are not specified, and a general slowdown, or at least the sense of one, in the global economy. The general idea behind the latter is that a slower economy elsewhere in the world means less trade and investment will find its way to the Philippines, contributing to a slowdown of the economy here.
As an expression of general risk factors, these reasons probably work, but they are impossible to quantify; there is no way to connect “slowing global economy” to a number like “5.8 percent” other than by making an educated guess. Those guesses, as it turns out, are practically useless, because circumstances change quickly enough to render them obsolete before they are even published. The research that goes into putting together something like the “Philippines Economic Update” takes a couple of weeks to complete in a large and decidedly un-agile organization like the World Bank. It could not have taken into account — because the events had not happened yet — situations like the Trump impeachment and the Turkish escalation in Syria that will have knock-on effects on the global economy. Indirectly, at least to some degree, these will also affect the Philippine economy.
So why even bother to make growth forecasts? There really is no practical use for them, except as an indicator of external perceptions. Those perceptions do enhance or detract from investment assessments to a modest degree, so the country’s economic policymakers may consider it worthwhile to try to manage them. The best way to do that might actually be to ignore them, and focus on consistently sticking to their program.
ben.kritz@manilatimes.net
Twitter: @benkritz