Time for fiscal caution

While recently we have not heard it often, “When the US economy sneezes, the Philippines catches a cold” was a mantra. But in fact, it was never true that the Philippines followed the US. if you look at the historical record, Bangladesh could talk about catching a cold from the Philippines as its economic growth lagged but tracked our economic peaks and valleys.

For the 21st century, Bulgaria was a better leading economic indicator for the Philippine GDP “Annual Growth Rate” than the US.

The globalization reality is that everybody’s economy tracks everyone else’s and follows a worldwide general trend. The outliers are caused by war, big or small, and by incredibly bad government policies such as perpetually in Argentina and Zimbabwe, or suddenly as in the case of Sri Lanka.

As most of the world is recovering from the Covid economic chaos effects even with the war in Europe, the US is not recovering. The GDP in the US expanded 3.50 percent in the first quarter of 2022 over the same quarter of 2021. By comparison, the Philippine GDP expanded by 8.3 percent in the first quarter of 2022 over the same quarter of 2021.

The GDP “Annual Growth Rate” is an important number but gives a false impression, as it does not show the short-term economic growth trend. It is a year-on-year comparison. It is like saying that you have more net worth today than you had in the economic “snapshot” of 12 months ago.

Now we need to look at the current trend of economic growth. “The US economy contracted an annualized 1.6 percent on quarter in Q1 2022.” Again, in comparison, “The Philippine economy grew by an annualized 1.9 percent in Q1 of 2022.”

Two consecutive quarters of economic contraction is the definition of a “recession,” which both the US and the Philippines experienced in the first two quarters of 2020. In 2021, the Philippine economy was much more fragile than in the US as while the US was showing 6.7 percent growth, the Philippines saw a 0.2 percent reduction of economic activity in the second quarter of 2021.

But in the second quarter of 2021, the Philippine was deep in Covid (10,000 new cases per day) with much of the country under Enhanced or Modified Community Quarantine. In the last two quarters of 2021 and still with Covid burning, we managed an average 3 percent growth.

On July 28, 2022, the US will announce the first read on the second quarter 2022 GDP, and here is when it might get scary.

The Federal Reserve Bank of Atlanta has been using a forecasting tool called “GDPNOW” since 2011. “It is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter.”

The GDPNOW track record is better than some, worse than others. However, pre-covid, the overall error factor was 0.00 percent. “The GDPNOW model estimate for real GDP growth in the second quarter of 2022 is negative 2.1 percent on July 1, down from negative 1.0 percent on June 30.” Bank of America, the second largest American bank, on July 1 revised down its estimate for GDP growth in the second quarter from 1.5 percent to 0.0 percent.

Two successive negative growth quarters and it is officially a recession. However, Bank of America also said that it expects the economy to grow 2.3 percent for the full year this year.

Fortunately, we do not depend on the US economy and the world is also becoming less reliant on Uncle Sam’s bank account. Yet the Philippine government must be cautious fiscally, both in granting new monetary investment incentives and with finding new ways to spend taxpayer money.