Getting real on growth

For the record, we at the Ateneo Center for Economic research and Development announced a 3 percent to 4 percent GDP growth projection for 2021 at the start of the year, at our Eagle Watch Economic Briefing on January 21. Everyone else, including the government, saw us growing by 6 percent to 7 percent. The fourth quarter figures for 2020 were not even out, and our main basis was our forecasting model developed and maintained by our economics faculty colleague, Dr. Luis Dumlao. The model actually projected a mere 2.9 percent for 2021 GDP growth at that time, but there is always a subjective “fudge factor” applied on econometrics-based GDP forecasts to account for subjective judgment and economic intuition. So, we built in a bit of upside on the expectation that vaccination for Covid-19 would help things along, and, thus, called it at 3 percent to 4 percent. Even so, we may have sounded like a bunch of doomsayers then.

Fast-forward to the present, and most other analysts have since downgraded their growth forecasts, some 2-3 times. Government itself has settled on a much more modest but arguably still optimistic 4 percent to 5 percent. But we in Eagle Watch can stand pat on our 3 percent to 4 percent projection, now much more credible than it may have looked when we first unveiled those numbers in January. And after two quarters of actual GDP data, it’s easy to show why.

But first, let us disabuse ourselves of the notion that the Philippine recession ended with the announced 11.8 percent second quarter (Q2) GDP growth. The data actually tell us that we have just entered the second dip of a double-dip recession, the first dip of which actually ended in Q3 last year (yes, the recession actually ended—at least momentarily—back then!). Many have called attention to the misleading “base effect” that led to the 11.8 percent headline growth rate. Indeed, that widely cited Q2 growth rate was misleading because it is reckoned against an abnormally depressed GDP level in the same quarter last year, when the economy was on a virtual standstill at the worst of our lockdowns.

Under these circumstances, it makes far better sense to focus on the way many other countries report their GDP growth rates: as the quarter-on-quarter (QOQ ) growth rate of real GDP (that is, valued in constant prices; the Philippine Statistics Authority now uses 2018 prices) statistically adjusted for seasonality, and annualized. The one advantage of year-on-year (YOY) growth rates that gains it the favor of users is that seasonal effects are automatically excluded. But one gets a more real time picture of growth with the seasonally adjusted and annualized QOQ measure. The chart graphs the seasonally adjusted GDP, which the PSA also routinely releases (but hardly anyone seems to pay attention to).

Last year saw the onset of recession in Q1, when both YOY and QOQ growth turned negative as a result of calamities then, notably the Taal Volcano eruption. Then came the steep drop in Q2. Against that, this year’s Q2 figure was 11.8 percent higher—and yet GDP actually fell QOQ (-1.3 percent, or -5.3 percent annualized—which would have been the headline figure reported elsewhere). That reversed successive rises since Q3 last year. And we can expect Q3 to see a further decline, as quarantines tightened even more this quarter. The definition of recession as two quarters of successive contraction actually has the QOQ movement in mind, so this officially puts us in recession again after the first one ended in Q3 last year—truly a double-dip or W-shaped recession.

So what YOY GDP growth rates will we see in Q3 and Q4? From the graph, these rates would be much smaller, as the base levels last year are already much higher. The base effect would work in the reverse, leading to likely Q3 and Q4 YOY rates of only 3 percent to 4 percent and 1 percent to 2 percent, respectively, even based on the most optimistic scenario with the steepest forward trajectory. All told, the full year growth rate would fall within 3 percent to 4 percent.

When will we get back to the GDP level before the recessions hit us? Under the optimistic scenario, it would be late next year. The medium scenario, sloped similarly to the 2018-2019 trajectory, would get us back by late 2023. But if we keep bungling our recovery and follow the third arrow, we may not even regain our footing by 2025.

There is much work to be done, and if we are to make it to the best scenario, it has to be done right.