Low-base distortions seen persisting in 2022 growth data

MANILA, Philippines — What economists call “base effects” would likely continue to distort economic data next year, as renewed coronavirus lockdowns weigh on an already fragile recovery.

“With the Philippines’ economy is still hampered by the lockdown measures in 2021, we see scope for base effects to boost headline growth in 2022 as measures are eased through the year,” Fitch Solutions, a unit of the Fitch Group, said in an e-mailed commentary on Wednesday.

What this essentially means is that the 2022 gross domestic product readings would inevitably come out strong because it would be compared to this year’s figures, which are expected to be depressed by fresh lockdowns.

While strong GDP growth rates are something to welcome, base effects can distort one's understanding of whether the GDP figure reflects actual improvements in Filipinos’ lives amid hard times. Take for example the second quarter GDP performance: the economy grew 11.8% year-on-year following a record-breaking 17% collapse in the same period last year. But underlying weaknesses were evident as GDP contracted by 1.3% quarter-on-quarter due to strict lockdowns last April.

With the capital region and some provinces back to strict restrictions this month to curb the spread of Delta variant, economists, including those at Fitch Solutions, turned less optimistic. The Fitch unit expects the economy to grow 4.2% this year, lower than its previous forecast of 5.3%.

For next year, Fitch Solutions cut its growth projection to 6.8% from 6.9% previously despite boosts from base effects. They said the economy may return to pre-pandemic levels by late-2022, but recovery may be pushed back to 2023 if the country still struggles to reach herd immunity.

But what’s uncertain at the moment, Fitch Solutions said, is when the Philippines would return to its pre-pandemic “trend growth”, or the rate at which the economy can potentially grow in the next years without the risk of stoking inflation. This is because both consumer and state spending are expected to pull back once the economy recovers, as households and the government use their money to pay debts that have accumulated during the health crisis instead of spending them on productive activities.

"It is worth noting whether the economy ever returns to its pre-pandemic trend level. We do not expect that over our forecast period noting increased debt burdens in the public and private sector, as well as a loss of household savings, as weighing on longer-term growth," the Fitch unit said. 

“Much will depend on reform efforts and the ability to address some of the issues that held back growth before the pandemic."