Momentum breakers

Is our economic momentum about to dissipate? Recent challenges on the economic front, most prominently speeding inflation, have led some to doubt the sustainability of the economic momentum we appear to have been building over recent years, starting in about 2012.

The turning point was really 2010, when total investment (aka gross fixed capital formation) broke away from the past decade’s lethargic performance, and started growing in the double digits. However, the Aquino administration’s clampdown on questionable public investments, especially graft-prone infrastructure projects, drove the 7.3 percent GDP growth in 2010 to fizzle down to 3.9 percent in 2011.

That was the last of the “postelection dips” that seemed to characterize every past presidential election year and the year immediately following. That all changed with the last presidential election in 2016, as we have managed to sustain GDP growth within 6-7 percent ever since it bounced back in 2012. We appear to have managed to reach a new higher growth track in the 6-7 percent range, whereas our historical performance suggested that our sustainable long-term economic growth pace was more in the neighborhood of 4-5 percent.

The International Monetary Fund, in its global economic outlook, expects global GDP growth to speed up to 3.9 percent this year, up from last year’s 3.7 percent. The IMF sees the boost to come not from the advanced economies, which will grow only by 2.4 percent, but mainly from “emerging markets and developing economies,” to which we belong, which the IMF projects to grow by 4.9 percent this year, and 5.1 percent in 2019.

Against these numbers, that we have been in the 6-7 percent range for the last six years tells us that we have indeed been among the fastest-growing economies worldwide. But the question is: Can it hold, especially with current headwinds and internal drags that threaten to derail us (pardon the pun)?

What are some of these headwinds and internal drags I refer to? The external headwinds are well known: rising oil prices, especially induced by US President Donald Trump’s actions to isolate Iran, a dominant oil producer; rising interest rates in the United States, which suck out foreign funds from our own financial system, forcing us to raise ours as well; and Trump’s trade war with China, which threatens to slow down global trade in general, and with it, our own export growth prospects.

The first, along with the spike in rice prices, has been the main driver of our speeding inflation (not recent tax reforms, as is commonly believed), which has the effect of dampening consumer demand. The second will dampen both consumption and investment spending, further slowing demand for goods and services that provides the impetus for production side growth. The third is likely to have minimal direct effect on our growth, given the also minimal contribution of exports (a fault in itself) relative to domestic sources of demand. But it will impact on the peso-dollar exchange rate, to the extent that our exports slow down even as imports continue to surge to feed the requirements of our infrastructure buildup via the “Build, build, build” program. This will in turn feed further into inflation, with its own growth-dampening effect already described.

Internally, we are beset with a growing government fiscal deficit, which is already testing the traditionally “safe” level of 3 percent of GDP, as government revenues slow down with overall growth while government spending speeds up to fund major new spending. These include universal free college tuition, free irrigation, and other populist laws that bring pogi points to politicians, but cost public coffers, and general taxpayers, rather dearly.

A growing fiscal deficit forces our government into more borrowings, which, if unchecked, could compromise our macro-
economic stability. We also face implementation challenges on the ambitious infrastructure program, and past experience doesn’t inspire confidence in this. And then there is the potentially disruptive move to federalism.

Don’t look now, but if we end up squandering away our already nascent economic rise, we would only have our own selves mostly to blame.

cielito.habito@gmail.com