Countermeasures

The Philippines was one of only a handful of economies to defy the global recession that came in the wake of the 2008 financial meltdown. There were many reasons explaining that feat, not all of them flattering.

Our economy’s growth was not trade-driven. That was a weakness that prevented us from benefitting when the global economy was in a boom phase. But it becomes a source of strength when insulating our economy from downturns.

Our economy could hardly be described as export-driven in the way Japan was during its heyday and China has been the last three decades. We export bananas and coconut products, along with some minerals. We do export, lest we forget, a lot of labor to bring in much needed foreign exchange.

When the global recession hit, the growth in OFW deployments took a hit. Our electronics sector, consisting mainly of assembly lines for consumer products, reeled.

If our economy kept growing while the global economy froze, it was largely under our own steam, driven principally by consumption demand. That demand was, in turn, fueled by remittances from our army of expatriated workers. It did not produce spectacular growth rates; but it also made us less vulnerable to an adverse global environment.

These are the ironies of Philippine development.

Credit will have to be given to the Arroyo administration’s prompt application of  “counter-cyclical measures” to prevent the economy from being dragged into the global recession. These measures consisted mainly of front-loaded spending intended to keep domestic demand robust.

The “counter-cyclical measures” ordered by the Arroyo government effectively secured our respectable but fragile growth. They might not have cured our economy’s structural weaknesses. But they saved us from the deleterious effects of a recession.

Subsequently, the world’s major central banks embarked on a major program of lowering interest rates and purchasing bonds to stimulate economic activities. The concerted effort stemmed recession and restored the global economy to the path of growth.

Unfortunately, we did not take full advantage of the period of cheap interest rates and cheap oil to address the structural weaknesses of our economy. We did not borrow to grow our economy and close the infrastructure gap with the rest of the region. There was no effort to revolutionize our farm systems and prevent agriculture from becoming the Achilles’ heel of the national economy.

The period from 2010 onwards was ideal to embark on an infra modernization program, capitalize our farm systems, broaden the financial system and ease the congestion that was stifling our growth. During that period of strategic opportunity, however, we lacked the economic statesmanship required to build stronger foundations for future growth.

Unhealthy signals

Signals pointing to a global economic downturn are roiling the markets. The major culprit driving us toward a weaker global economy, as pointed out by European leaders during last week’s G-7 summit, is the constriction of trade.

Last Sunday, a new round of tariffs that will constrict trade between the world’s two largest economies took effect. Asia’s stock markets promptly dropped yesterday, the first day of trading. The jitters were aggravated by a report that China’s manufacturing output declined for a fourth straight month.

Donald Trump might troll the report concerning China’s declining manufacturing output – just as he released last week a confidential photo of a failed Iranian missile launch simply to taunt Tehran. He is that sort of adolescent. But the manufacturing slowdown in China is not comforting for everyone else. It reinforces already strong signals that the global economy may be heading towards recession.

China, after all, is the most important growth driver for the global economy. Should its juggernaut economy grind to a halt, the whole world suffers.

The weakening of the yuan, for instance, has reflected in a dramatic drop in Chinese tourist arrivals to Thailand. The Thai economy is dependent on its awesome tourism industry and China is its largest source of tourists. China, by the way, is now also the largest source of tourists to the Philippines.

A weaker yuan will translate into a lesser demand in China for European exports. China is now the largest market for Europe’s high-end exports. A dramatic decline in its exports could be the last straw pushing the Eurozone into recession.

The trade war Trump launched against China has been the impetus driving down Asia’s other currencies. The weaker Asia’s currencies are, the lesser consumers in this dynamic region can afford to consume US and European exports. That will reflect in manufacturing declines in North America and Europe as well. 

In a word, the US-China trade war is simply the first domino to fall in a chain that could lead to calamitous consequences.

With the British and German economies contracting, and the rest of the Eurozone economies flat, it is nearly certain the world is in for another bout with recession. The US economy still posts growth in the aggregate, but economists point out that parts of the huge American economy are already receding. Those parts also happen to be Trump’s much-vaunted political base.

As we did in 2008, it is now time for the Philippine economy to dig the trenches to protect our growth from an increasingly adverse external environment.

The BSP has signaled readiness to lower rates further. That will be an effective countermeasure.

We might consider a larger allowance for deficit spending. The lower inflation rate gives us headroom for doing this. It will help in keeping domestic demand robust, insulating us from recession.