An economy in the recovery room

Twice a year we look at the economy for our clients. I thought I’d share a few of our thoughts in that report with you.

The third quarter results came two weeks ago, and you don’t need to be told, it’s been a bad year. The impact of COVID-19 has resulted in the worst performance in modern times. GDP collapsed by 11.5 percent in the third quarter — better than the -16.9 percent in the second quarter, but a long way from recovery.

Consumers staying home, or without any money; workers unable to get to work; business activity limited by the quarantine; the “Build, build, build” program slowed down; world markets in turmoil—all these led to a desultory economy.

So next year has to be better, and it will be. But because of the 9-10 percent fall we expect this year, the 5-7 percent growth we forecast next year will still leave us behind the level we were in in 2019. It will take 2022 to bring us back to normal.

The fourth quarter should see some improvement as access to public transport improves, COVID-19 gets handled better, and industries get back to about 70 percent of their capacity. But those engaged in tourism, travel, leisure and recreation, dining, and much of retail will still be grappling with restrictions, and will hardly improve from their depressed state. The applaudable efforts of government to stimulate the economy and give people some relief through the Bayanihan Act 1 and 2 will mitigate some of the damage, provided the money gets spent as intended. But that extra spend does mean we’ll have a government deficit of -8.5 percent, almost three times our historical norm. Fortunately, it’s been well controlled by Finance Secretary Sonny Dominguez, as most other countries are doing worse. All the rating agencies agree, and have kept our credit rating stable.

So, onto 2021. Christmas gives us an emotional break, a kind of closing the door on the unsettling past. So I see us moving into 2021 more optimistically. That will be good for the economy as people act on how they feel: confident, they spend and invest; depressed, they don’t.

Congress is passing a 10-percent-higher budget, which should be good, but there’s been considerable question about the disposition of that budget. Too much of it is politically driven, leaving not enough for where it’s really needed, such as for health (including the purchase of vaccines). We also need a greater budget for the departments of information and communications technology and agriculture which must lead our future growth, and more oriented to helping MSMEs and further improving the transport system.

The absence of discretionary spending, as many people are just back to work or still have to rebuild depleted savings, not to mention the lingering fear of risking exposure to the virus or the tedious process of getting cleared for travel, will impose limits to growth. As the new normal state of activity begins to take hold in the second half of 2021, economic growth will be faster. Hence, we expect GDP to grow by about 5-7 percent in 2021. Despite the poor performance of exports due to low world demand, the peso uncharacteristically gained against the US dollar. The low demand for dollars due to weak imports is causing a pile-up of dollar surplus as OFW remittances remain surprisingly strong (down only by 1.4 percent), and BPOs are generating $26.2 billion this year, only about 0.5 percent down from last year’s $26.3 billion. These factors are driving the peso up.

When economic activity is restored to near normal, and the demand for dollars kicks up again, the peso will give up much of its gain. Consequently, the exchange rate will average between P50:$1 and P52:$1 in 2021, which brings it back more or less to its rate in 2019.

Cuts in policy rates to historic lows and in bank reserves by 2 percentage points have resulted in a bank lending rate of 5.5-6.5 percent. There’s likely to be a modest increase in 2021, but still lower than the 7.1 percent in 2019.

Inflation, you’ll be glad to hear, will remain low, somewhere between 2 and 4 percent, even with some likely shortages in some food products.

It’s an economy devastated by a pandemic, but on the road to recovery in 2021, and full recovery in 2022.

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