Cloudy crystal balls” was the title of an article I wrote in early 2020, which proved to be an apt description of how economic conditions worldwide were to unfold that year. The International Monetary Fund (IMF) in the January 2020 release of its World Economic Outlook projected a 3.3 percent global GDP growth for that year.
At the end of the year, it turned out to be—3.3 percent—the right number, but the wrong sign; instead of growing, the world economy shrank by that much. The IMF projected a 5.8 percent GDP growth for “Emerging and Developing Asia,” a grouping that includes us and 29 other Asia-Pacific countries. The actual number turned out to be negative 1.0 percent. Of course, no one had anticipated how the COVID-19 pandemic was to batter the world economy in 2020.
Even barring anything as cataclysmic as the pandemic, the year 2025 holds several uncertainties that make economic crystal balling a challenging exercise. Among the most prominent drivers is the direction the American economy will take under the second presidency of Donald Trump. The problem is that we can’t take Trump’s bold policy pronouncements in his presidential campaign and after his election victory at face value, because of the inherent contradictions therein. Assuming he will appoint and listen to competent economists to manage the US economy (on which there are doubts because he often ignores good advice, and given some people he has named to key positions so far), one can reasonably expect that there will be deliberate downplaying, if not backtracking, on some of his promised economic policies.
What is clear is that the US dollar has strengthened since Trump’s election victory, on the general anticipation that his administration will be friendly to American business, especially big business. But the wide mass of consumers will be hurt by his threat of even higher tariffs on imports from China, Mexico, and other countries from which the US buys much more than it sells to, as it will mean higher prices and escalated inflation. This has led the US Federal Reserve (the US central bank, aka the Fed) to moderate its previously announced interest rate reductions in 2025, after making a recent 25-basis point (i.e., a 0.25 percentage point) reduction. This Fed signal that it is soft-pedaling on interest rate cuts bolsters a seeming consensus among many analysts that the US dollar will strengthen as Trump assumes the presidency in January, and will remain strong, at least in the next year. The Economist recently wrote that Trump’s economic policies “look set to turbocharge the greenback.”
Here at home, the US Fed’s December rate reduction has given the Bangko Sentral ng Pilipinas (BSP) more comfort to do a similar 25-basis point reduction to help stimulate more economic activity. Even so, the BSP will watch the movement of the peso vs the US dollar as the latter is projected to remain strong (which translates to downward pressure on the peso). Will it spell trouble for the Philippine economy? The BSP is less worried about the exchange rate per se than it is about inflation, but it could worry to the extent that peso depreciation begins to fuel higher inflation. This could force the BSP to raise interest rates anew and stifle economic growth in the process. That is why our economic managers, and those of other countries, will be closely watching out for the effects of Trump’s actions in the months ahead, particularly their effect on the US dollar. And his very unpredictability is part of what makes it difficult to make solid projections on our own economy’s performance in the year ahead.
Uncertainties on our domestic front add to that difficulty. The midterm elections could provide a boost, as election years have historically been marked by an extra push on economic growth. Things could also be better if the agriculture and fisheries sector could finally emerge from the slump it had been on even before the COVID-19 pandemic struck. Much depends on how our local governments could take their “rowing” roles in the sector more effectively, with the Department of Agriculture effectively “steering” them as mandated under the 33-year-old Local Government Code.
But the first half of the year will be dominated by the election campaign, and it will be difficult to expect much from our local officials by way of meaningful actions to strengthen that sector that is the very backbone of our economy. So the outlook could remain rather murky there. While manufacturing could provide another source of hope for a better year, we need to dramatically improve our ability to attract new investments in the sector, and that requires a lot of homework that our politicians and bureaucrats have long neglected.
So what’s in store for 2025? Sorry, but I’m afraid my crystal ball has gotten cloudy again.
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