Don’t frost a turd and tell us it’s a cupcake
Ben D. Kritz08
FOR months, the government and we in the media have been telling and retelling similar narratives when it comes to key economic indicators, primarily the country’s inflation rate: Inflation and other data such as the peso’s exchange value should be read in context, and their significance not overstated; the economy, from a broad perspective, is still one of the fastest-growing in Asia, and making tangible gains despite the apparent negative implications of some stand-alone indicators.
Until now, those assertions could be supported. After the revelation this week, however, that June inflation accelerated to 5.2 percent the mantra of economic positivity just sounds ridiculous. The statement to the media on Friday by Duterte mouthpiece Harry Roque Jr. was a perfect example. “We have explained this before. There’s money going around, that’s why we have inflation. There’s money from the free tuition, from the taxes, there’s money because of the Build, Build, Build [infrastructure plan], but it is not something to worry about,” Roque said.
Finance Secretary Sonny Dominguez 3rd offered a similar perspective in reply to some criticism on Twitter later, explaining away the high inflation as “demand pressures,” also reassuring the public that it was a positive indicator.
If talk could build things, the Duterte administration would have erected a stairway to heaven by now.
The reality of the situation is that even though the economy is still far from being in a condition that could be described as “in trouble,” it is eroding to some extent, and those of us who have spent the past few months arguing otherwise are in error. With the US president having officially launched his ill-advised trade war against the rest of the world, the situation the Philippine economy is in now might transform from merely cooling a bit to retreating at an alarming rate, if our policymakers do not step in with some aggressive action.
Roque’s explanation of the sources of “money going around” is laughable. First, money from the free tuition is not somehow additional money. If tuition was not free, that money would still be spent and that spending reflected in inflation; it would just be reflected in a different part of the CPI price basket. Second, while there is more disposable income from lower income taxes for working people, most of that positive effect is canceled out by the expansion of the proportion of the workforce that is exempted from taxes on the one hand, and by the self-feeding loop of inflation more disposable income creates on the other. Finally, the “build, build, build” plan is still largely reflected as ideas on paper and investment pledges rather than actual new activity and money flows. The majority of the projects currently underway are things that were programmed under the last administration; the fact that they are continuing and in a few instances have started under the current administration does indeed indicate positive economic activity, but is something that was expected, and already taken into account in forward-looking forecasts for the country’s growth from two or three years ago.
Finance Secretary Dominguez’s insistence that inflation is a demand-driven phenomenon – a point he has stuck with for several months – is one example of an oddball point of view that makes one wonder exactly how he earned his high-flown reputation. For one thing, it directly contradicts the view of the BSP – the agency in the best position to do something to alter inflation’s trajectory – that first-half price growth has been “basically driven by supply side factors,” according to Deputy Governor Diwa Guinigundo. In particular, oil prices are half again as high at around $73 a barrel now than the planning assumptions from last year of $51 to $52 a barrel. For another, Dominguez is apparently overlooking the impact of some currently severe supply pressures in key agricultural commodities such as rice, sugar, and corn, which has a particularly huge impact on the entire food supply chain. Perhaps the reason these problems are not acknowledged is that they are in part the result of the administration’s mismanagement.
One solution Dominguez has offered to curb the high inflation rate is to remove tobacco from the CPI basket. This would accomplish nothing except to statistically whitewash the price data; whether Dominguez likes it or not, tobacco is still a major expenditure among consumers, and the headline inflation rate reflects reality a little more accurately if it is included. Furthermore, the assertion that tobacco has pushed inflation upward (largely due to the impact of higher excise taxes) is just plain wrong: The headline inflation rate, which includes tobacco, alcoholic beverages, food, fuel, and other items that tend to be volatile, rose 0.6 percent from 4.6 percent in May to 5.2 percent in June. However, core inflation, which excludes those volatile inputs, rose faster at 0.7 percent from 3.6 percent in May to 4.3 percent in June. Thus whatever is driving inflation, it is not among the inputs with the prices that fluctuate the most, and that further indicates a supply rather a demand-driven situation.
Finally, as another telling indication that the bright picture of the economy the government is painting is actually a bit duller than they would have us believe is the slowdown in manufacturing output in May, which of course was occurring at just the same time as inflation was accelerating again. May’s volume of production index rose 19.8 percent year-on-year in May, but that was a marked deceleration from April, which saw a 29-percent increase; in both months, the high positive figure could be partly attributed to a low base, as manufacturing was retracting at the same time last year. Manufacturing output in value terms also slowed from a month earlier, although not as much as volume; a large part of the difference between the two measures can be explained by the inflation rate and weak peso. Taken all together, the indications are that demand is slowing as the inflation rate remains high.
While the economic situation is not dire, the stubborn propensity of the current government to give everyone the impression they have no real grasp on reality is worrisome. Conditions are such that if the country’s economy is not monitored with rational care, things could quickly go beyond anyone’s control.
ben.kritz@manilatimes.net
The post Don’t frost a turd and tell us it’s a cupcake appeared first on The Manila Times Online.