FIRST PERSON - Alex Magno (The Philippine Star) - June 4, 2019 - 12:00am

The good news is that oil prices have been dramatically declining the past two weeks. The bad news is that this is happening because of general expectation global economic activity is bound to slow down.

If last week’s dramatic downtrend continues, we could find Brent crude selling at under $60 per barrel. This happens despite rising tensions in the Strait of Hormuz and rising violence in Libya.

The most precipitate event causing the decline in oil prices is President Trump’s arbitrary decision to impose escalating tariffs on all imports from Mexico. That unexpected imposition sent the markets stumbling across the globe. Mexico is the US’ biggest trading partner. If Trump wanted oil prices to go down, he inadvertently found a way to do it – albeit at great economic cost to everybody else.

Tariffs on imports from Mexico, combined with the effect of tariffs on Chinese imports, will penalize the American consumer. This will result in lower sales in the US market and a disincentive for businesses to make new investments. This is the reason for the bearish sentiment in the US stock market.

Trump’s badly considered tariff impositions will constrict global trade. This is the reason why expectations for global growth have been scaled down. Prospects for lower global growth in turn feeds into lower demand for oil. We are in a vicious cycle.

All countries will now have to find countercyclical measures to minimize the impact of global slowdown and optimize the benefits from cheaper oil.

For the Philippines, the dramatic decline in oil prices will help bring down the inflation rate further. This creates more headroom for the monetary authorities to introduce more aggressive measures to induce domestic growth.

Our economy is facing strong headwinds this year. The US-China trade war will inevitably scale down growth for the entire Northeast and Southeast Asian region. This will have adverse effects on the growth of our agricultural exports and tourism. The bulk of our tourism flow comes from China, South Korea and Japan.

Agriculture is our economic black hole. It is hardly expanding. We fail to supply domestic demand for agricultural products. This forces us to import food, aggravating our balance of trade deficit. We need imaginative agricultural policies to produce some growth in this sector.

If our agriculture sector was growing, we could easily manage 7 percent growth without inviting an inflationary backlash. But there are simply too many forces pushing us back to the fold of subsistence agriculture in the name of social justice.

The main driver of our economic expansion remains to be public spending on infrastructure modernization. The ‘Build, Build, Build’ program is funded mainly through official development assistance. Public works spending has huge multiplier effects on domestic economic activity.

Fortunately, we have this to bank on to nurture growth despite inhospitable global economic conditions.

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