A very tough recovery

What do past recessions tell us about how fast we can rebound from the deepest contraction our economy has seen in modern history? In our last deep recession 36 years ago (1984-1985), the economy actually shrank by less (7.3 percent) than it is projected to have sunk this past year (9-10 percent). It took us over five years then to regain what we lost after 1983, when the Aquino assassination triggered a downturn marked by massive exodus of capital that threw us into a financial crisis. Will it take that long to regain the even deeper loss we incurred last year?

Forecasts by seasoned analysts and respected public institutions that predict growth to shoot back up by as much as 7.5 percent this year imply that we would recover what we lost last year in less than two years. I find it hard to be as optimistic. Let me explain why.

There’s a basic difference between an economic downturn caused by a financial crisis, like what hit the Philippines in 1984-1985 and the world in 2008-2009, and one caused by a pandemic, where both the demand and supply sides of the economy are squeezed. When funds were massively shifted abroad to escape domestic political turmoil in the early ‘80s, or when billions were lost from collapsing global financial giants in 2008, the “real” economy went down because the financial collapse constricted financing for firms. Cash-strapped firms had to cut production and cut jobs, in turn forcing belt-tightening and reduced consumer spending, especially by the working classes. But the moneyed class with deep pockets went on spending anyway, and anecdotal evidence of this in 2008-2009 included surging sales of Rolls Royces especially in America, and of table wines in the Philippines. The squeeze was thus prominently on the supply side.

In contrast, the “coronavirus coma,” as Nobel laureate economist Paul Krugman puts it, shrank spending almost across the board, with people from all walks of life immobilized in their homes, on top of losing income from the businesses standstill. Consumer spending, which accounts for the bulk of demand for our economy’s goods and services, has so far dropped cumulatively by 8.2 percent (far more deeply by 15.3 percent in the second quarter). But in 1984, consumer spending still grew 1.2 percent, and fell only marginally by 0.5 percent in 1985. It in fact kept growing by 3.7 and 2.3 percent in 2008 and 2009, respectively, slowing down only slightly from 4-5 percent in preceding years.

I’ve heard it argued that the stronger financial system we have now compared to 1984 and 2008 would bring recovery more rapidly than in those financial crisis episodes. But having strong banks hardly helps us now, when the firms left standing, that see little if any buyers, won’t even borrow. Meanwhile, banks are reportedly even more rigid about extending loans. Unless and until Filipinos feel confident enough to move around freely again, it’s hard to expect a return to pre-COVID-19 levels of economic activity.

So how long would it take to recover that confidence? Researches on the recovery from the Spanish flu pandemic a century ago indicate that it took 4-5 years to return to former levels of economic activity in the United States, and shed social distancing and face masks. But proportionately more workers were in industry and farming jobs then. Now, the bulk of workers (in America or the Philippines) are in service sector jobs that rely on person-to-person interaction, which people will keep shying away from until widespread immunity is attained via vaccination or herd immunity.

There is one disturbing finding from the 1920s post-pandemic experience: It left large numbers of people disabled or in poor health. Researches show that survivors ended up with higher rates of neurological disorders, coronary heart disease, and shorter life spans, and those born to mothers exposed to the flu had shorter life spans and lower educational attainment. In the Philippines, add to that millions in our future labor force for whom, even if spared from the virus, the now escalated hunger and severe malnutrition could leave them with lifelong reduced brain and physical capacity.

We’re in for a very tough recovery indeed.

—————-

[email protected]