No Free Lunch

Is our economy overheating?

Lately, I’m often asked if the economy is “overheating.” I am also often asked if our economic bubble is in danger of bursting, and a collapse is imminent (often with particular reference to real estate and property development).

Those are not the same questions. What the first essentially means is that demand for goods and services in the economy is growing faster than growth in its capacity to provide them, thereby making the growth unsustainable. The latter implies the opposite, where there is too much growth in production (such as overbuilding of office or residential space) relative to actual growth in demand. Either way, the result would be an economic collapse that would shrink the economy.


What are the economy’s vital signs? I go back to my PiTiK test that looks at prices (presyo), jobs (trabaho), and incomes (kita) as gauges of the economy’s health. Until recently, it was two out of the three being good news, with rising inflation being the bad news.

The inflation rate as of the first quarter was 4.8 percent, the highest among our neighbors. However, unemployment was at a historical low of 5.3 percent, translating to about 2 million workers without a job, whereas it was closer to 3 million in years past. Gross domestic product (GDP), which measures both production and incomes as two sides of the same coin, was reported to have grown by 6.8 percent, speeding up the previous year’s 6.4 percent growth in the same quarter. That was also among the fastest in Asia and in the world. At the same time, surging imports were widening the country’s trade deficit in the face of slowing exports.


These were the symptoms that led some to worry about our economy overheating, prompted especially by the rising inflation rate. Ten years ago, eyes were on Vietnam for the same reason. With inflation running at more than 14 percent and a GDP growth rate exceeding 8 percent, analysts began anticipating an imminent collapse.

The Vietnam authorities’ yardstick for taming overheating was simple: Keep the inflation rate below the GDP growth rate, at a time when the former outstripped the latter by up to 6 percentage points. Rather than temper the pace of growth, as prescribed by outsider analysts, the Vietnamese government targeted even faster growth. The economy sped right on, and inflation was eventually tamed back down to the 2-4 percent range.

At the time, that country was in a continuing infrastructure building binge, much like our own present proclaimed plan to usher in a “Golden Age of Infrastructure” via the government’s “Build, build, build” thrust. Vietnam was also boosting exports with an extraordinary surge in both agricultural and manufactured export products, which led it to overtake us in export earnings, and Indonesia as well by 2016. All that was propelled by a strong surge in foreign direct investments that gave a tremendous boost to the Vietnam economy’s productive capacity.

Why am I not too worried about our own economy overheating? First, price increases had in reality been slowing down since the start of the year. Many observers seem to have been thrown off by the rising inflation rate measured as the year-on-year rate. But the month-on-month rise in the Consumer Price Index—the statisticians’ measure of the aggregate price level—had actually slowed down successively from January to May, when it actually was zero percent, from 0.9 percent in January.

It was, in fact, the drastic rise in world oil prices (which rose from $30 to up to $80 per barrel) that was the primary reason for the year-on-year price increases, and not excess demand in the domestic economy. In other words, it was a cost-push, not a demand-pull type of inflation indicative of an overheating economy.

The second quarter data that came in recently further belies overheating, as (1) the first quarter growth proved to be an overestimate, and was lowered to 6.6 percent, and (2) second quarter growth had tempered to 6.0 percent. And even as unemployment is low, underemployment remains high at 17 percent, telling us that feared pressures on labor supplies are unfounded.

And if we do the infrastructure program right, we just might do a Vietnam ourselves.


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