When spending slows down
Did the Philippine economy slow down because there was not enough production of goods and services to meet demand? Or did the economy slow down because demand for those goods and services was not enough to sustain previous growth in production? More succinctly, was the slowdown because of slower supply, or was it because of slower demand?
Gross domestic product or GDP, the conventional measure of domestic economic activity, is measured from both the supply (production) and demand (expenditure) sides. In the former, GDP is broken down into its sectoral components, the three major economic sectors being agriculture, hunting, forestry and fishing (AHFF); industry, the bulk of which is manufacturing; and services. The services sector makes up the biggest portion, with a 58-percent share, while industry accounts for 34 percent, and agriculture barely 8 percent.
On the demand or spending side, GDP breaks down into household final consumption expenditure (that is, consumer spending); government final consumption expenditure (which does not include public investments, especially infrastructure spending); capital formation (investment spending by both private sector and the government); and net exports (exports minus imports). Consumer spending accounts for the bulk, or more than two-thirds (67 percent); investment spending contributes nearly a third, or 31 percent; government consumption 12 percent, while net exports (being negative because imports well exceed our exports), have a negative share of 10 percent.
There’s an old law in economics called Say’s Law that states: “Supply creates its own demand.” Jean-Baptiste Say, the 19th-century French economist to whom the principle is attributed, didn’t actually use those words, but wrote: “A product is no sooner created, than it, from that instant, affords a market for other products to the full extent of its own value.” Classical economists throughout the 19th century believed in the principle, until John Maynard Keynes turned it around in the 1930s, arguing that raising demand was the key to get out of the Great Depression.
Modern-day economist Paul Krugman put it this way: “Not only doesn’t supply create its own demand; experience since 2008 suggests, if anything, that the reverse is largely true — specifically, that inadequate demand destroys supply. Economies with persistently weak demand seem to suffer large declines in potential as well as actual output.”
This brings us back to our original question: Did our economy slow down in the third quarter because of a slowdown in demand (spending), or was it more due to a slowdown in supply (production)? Examination of the GDP data on the spending side shows where the slowdown happened: (1) growth in household consumption spending slowed down slightly from 5.4 to 5.2 percent (or 5.7 to 5.6 percent, taking the first three quarters together), and (2) exports slowed down from 18.8 to 14.3 percent while imports sped up from 17.2 to 18.9 percent. Government consumption and total investment spending actually both sped up (from 8.3 to 14.3 percent, and 10.3 to 16.7 percent, respectively).
How could overall GDP slow down so much (from 7.2 to 6.1 percent) when household consumer spending only slightly slowed down—and even as government consumption and total investment growth both sped up significantly? There are two reasons: Consumer spending makes up the bulk of total demand; thus, even a slight slowdown there makes a big difference overall. This squares with the slowdown in agriculture and food manufactures we showed last time, affected especially by much higher prices of rice and other food commodities. The other culprit is the slowdown in exports (18.8 to 14.3 percent) whereas imports sped up (17.2 to 18.9 percent). Over the first three quarters, the deficit between the two actually grew 53 percent, which is a lot.
The lessons to me are clear: We need to watch our exports and keep them from falling, as they have over recent months. More urgently, we must get food prices down, as higher food prices don’t only hurt consumers, especially the poor; they also ultimately affect jobs and incomes, because they end up slowing the entire economy.
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