BSP recession forecast alarming, but probably realistic

AFTER being taken by surprise by a gross domestic product (GDP) contraction in the first quarter of the year, the Bangko Sentral ng Pilipinas (BSP) has come up with a more realistic forecast for the second quarter. Over the weekend, BSP Governor Benjamin Diokno said the bright boys and girls at the central bank estimated that GDP likely contracted by 5.7 to 6.7 percent year-on-year, which is not at all comforting, but sounds about right.

Last year, when the government was just beginning to catch up from four-and-a-half months of crippled spending due to the delayed approval of the national budget, second quarter GDP still managed to register 5.4-percent growth. In other words, if the BSP’s current forecast is correct, the economy in the second quarter of this year would have, at best, shrunk back to the level recorded two years ago.

We will have to wait for a while to find out; the second quarter ends today, and it typically takes the Philippine Statistics Authority about two months to compile the data.

In his remarks to reporters, Diokno candidly admitted that the government had underestimated the severity of the coronavirus disease 2019 ( Covid- 19) pandemic. “The negative impact of the Covid-19 crisis is harsher than what was originally thought,” he said.

In an ironic way, that is reassuring, because unlike most of the rest of the government, the central bank chief is not exerting special effort to put the situation in a positive light. Thousands of businesses have gone under; nearly every inhabitant of the country has experienced the economic downturn personally; and everyone can see that, in spite of hopeful statements from public health authorities, the Wuhan Virus pandemic has not, in any sense, slowed down since March.

An estimated 5- or 6-percent contraction is certainly not encouraging, but on the other hand, if the BSP had given a more positive forecast, most everyone would have simply had one more reason to feel the government does not have a rational view of the current situation and is not up to the job of managing the crisis. Now, we can at least have some confidence that even if Health officials are trying to cure the virus with semantics while the head of the government’s pandemic task force is trying to look for it with a helicopter, the country’s monetary authorities have some idea of what is actually happening.

But perhaps only some; how the economists’ model views the “post-lockdown” economy is something that would be interesting to learn, because it may still overestimate economic activity. In rough terms, about 75 percent of the economy was brought to a virtual standstill by the enhanced community quarantine that took effect from mid-March to end of May. Since June 1, the economy has been incrementally “opening up,” so that on paper, at least, the ratio may have been reversed; 75 percent of the economy is now functioning — or, at least, is not prevented from functioning — while 25 percent is still in hibernation.

However, it is clear that those parts of the economy that are no longer restricted, or are only mildly attenuated by anti-pandemic measures, are not operating at anywhere close to the level that would be hypothetically expected. That much is anecdotally obvious when one ventures out into the now weirdly dystopian community; in spite of being open and being rather desperate for customers to return, most businesses are not seeing the surge they were counting on.

It is doubtful whether there is anything that can be done by monetary policy to remedy that situation. Adjusting interest rates, tweaking bank reserve ratios and intervening in the currency market can boost liquidity in the economy and tune prices, but that won’t help much if demand has not returned. The only thing that can affect that, it seems, is for the government to make real progress in fighting the pandemic. It hasn’t yet, and given that pandemics typically take about two years to run their course, it may continue to be unsuccessful for another year or more unless it drastically changes it approach, which seems unlikely.