Avoiding depression during PH recession

Published July 13, 2020, 10:00 PM

by Dr. Bernardo M. Villegas

Part 1

In tandem with the rest of the global economy, the Philippines is already experiencing an economic recession as it entered into the second semester of 2020.  GDP dropped by -0.2 percent in the first quarter of the current year, followed by an estimated -5.7 to -6.7 percent in the second quarter.  A recession is defined as two consecutive quarters of GDP decline.  The last time the Philippine economy slipped in to a recession was in 1998 when GDP dropped by 0.5 percent for the whole year as a result of the East Asian financial crisis which saw our ASEAN neighbors suffering GDP declines of anywhere from 5 to 7 percent.  The Philippines, being much less globalised than most ASEAN economies (with an export to GDP ratio of less than 40 percent), is the least adversely affected by a global depression.  When the world economy slows down, Philippine businesses focus their efforts on the large domestic market of 110 million Filipinos.  That is why during the East Asian Financial crisis (1997 to 2000) and the Great Recession (2008 to 2012), the Philippine economy was one of the most resilient among emerging markets, hardly suffering a decline.  This time, however, its main source of growth—the domestic market—has shrunk significantly as a result of the many lockdowns made necessary in combating the spread of COVID-19.  The recovery of the Philippine economy will depend on how soon a vaccine against the virus is discovered and in the meantime, how effective are the efforts of the Government and the private citizens to slow down the spread of COVID-19.

For business people and consumers to avoid being depressed by the prospect of a Great Depression hitting the whole world, it is advisable to see things in their proper perspective.  The worst thing that can happen to a national economy is for consumers and producers to lose hope in the possibility of a brighter future.  It is true that what is happening in 2020 worldwide can be compared to the two worst global depressions in the last 150 years.  During the 1870s, the whole world experienced the first Great Depression as a result of American inflation, rampant speculative investments (overwhelmingly in railroads), the demonetization  of silver in Germany and the US, ripples from economic dislocation in Europe resulting from the Franco-Prussian war (1870-1871) and major property losses in Chicago (1871) and the Boston fires (1872).  All these help to place an excessive strain on bank reserves.  About sixty years later, the second world-wide Great Depression started in the United States.  It began in 1929 and did not abate till the end of the 1930s  The economic recovery was  a result of the pump priming measures taken by the New Deal Government of President Franklin Roosevelt.  The  Great Depression of the 1930s was precipitated by the stock market crash of October 1929.  By 1933, unemployment rate in the U.S. was 25 percent and more than 5,000 banks had gone out of business.  There was also reckless speculation in the stock market in which everyone from millionaire tycoons to cooks and janitors poured their savings into stocks.  When the bubble burst, millions of workers lost their jobs.  Note that speculative activities fuelled by the get-rich-quick mentality of a large segment of the population were the common denominator of the two Great Depressions.

In contrast, the Great Depression of 2020 can be attributed mainly to the pandemic which led to the closing down of numerous businesses as a result of the huge drop in consumption demand that in turn was a product of the necessary lockdowns to limit the spread of the virus.  With a few exceptions, the financial institutions all over the world  have been generally stable and there was no sign of over-speculation in the stock markets.  Economic fundamentals continue to be strong in many emerging markets like the Philippines.  I always want to point out that the attractive features of the Philippine economy that earned us a lot of compliments from many independent think tanks and international financial institutions before the pandemic have not in any way disappeared.  We continue to have a young, growing and English-speaking population which was the strong foundation of the booming BPO-IT sector which can rebound quickly in 2021 as companies in the developed countries struggling to recover will be motivated to  outsource more of their business services to countries like India and the Philippines.  Our very youthful population (hardly diminished by the pandemic since the young were the least vulnerable to infection and deaths) will continue to have vast opportunities for employment abroad as overseas workers because the ageing crisis in developed countries in Europe and Northeast  Asia (especially Japan) is actually getting worse.  That is why our OFW remittances will recover very quickly in 2021, especially as more health workers, care givers, IT professionals and teachers are hired by the developed countries.

Estimates of Philippine GDP decline  for the full year 2020 can range from -2 to -5.  I tend to agree with the lower figure of -2.  Among other factors that are usually ignored in these estimates of GDP decline is the inevitable fact that we will have an increase of 2 million more babies for the whole year of 2020.  Every person born means an increase in consumption one way or another, i.e. food, clothing, health care and other basics for infants.  These automatically increase the consumption side of GDP.  As more regions, including Metro Manila move towards the status of Modified General Community Quarantine (MGCQ), it is very noticeable that Filipino consumers can be compared to a spring that has been compressed and is ready to bounce back strongly.  Although the unemployment rate has risen to a very high 17.7 percent of the labor force (equivalent to some 7.3 million Filipinos without work), there has only been a slight decline in the remittances from OFWs to their relatives, confirming the countercyclical nature of these financial contributions of Filipinos working abroad to their families in the Philippines.  When the  ten million or more OFWs perceive their relatives back home as suffering from  dire financial straits, the more generous they tend to be in their remittances.  The estimated 500,000 OFWs who are expected to return to the Philippines because they have lost their jobs abroad are still a small fraction of the more than 10 million OFWs.

 As long as there can be greater freedom of movement of workers under the MGCQ for most of the second semester of 2020, I expect a quick recovery of the BPO-IT sector which can employ more than 1 million well paid workers who can contribute to boosting the domestic market once again. Furthermore, it must be recalled that before the pandemic there were estimates of the Department of Tourism that 60 million or more Filipinos had sufficient income for them to travel  to other destinations in the country outside their homes.  For example, the province of Batangas, with its numerous beach resorts (Matabungkay, Nasugbu, San Juan, Jamilo Coast, Punta Fuego, etc. ) has been the favorite weekend destinations of families within the Metro Manila area.  Now that Batangas is already, as of July 1, 2020 under MGCQ mode,  one can already perceive a resumption of family weekends,  mountain climbing treks, motorcycle and bicycle rides among people from the NCR region.  Batangas will serve as a role model for other  provinces like those in the Bicol region, Mindoro, Palawan, Ilocos Norte and others that have been traditional destinations of domestic tourists.  Establishments that can immediately benefit from these domestic tourists will be the small and medium size enterprises in the travel and tourism industry,  such as bed-and-breakfast hotels, beach resorts and restaurants.  To be continued.

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