DESPITE the risks posed by inflation and other threats to its growth last year, the Philippine economy remains remarkably healthy by most reasonable standards. The still robust gross domestic product expansion, brisk consumer and government spending, and consistent profitability of most businesses are legitimate reasons for confidence.
We are increasingly concerned, however, that our relatively benign economic conditions may lead to a false sense of security in light of recent indications that the United States-China trade war may be starting to inflict collateral damage on the economy.
This past Tuesday, the World Bank released its key semi-annual Global Economic Prospects report. The report had an unusually alarming tone with which it discussed the near-term outlook, urging governments to take “urgent,” “critical,” and “imperative” actions to keep global economic growth from slowing too much.
The World Bank report explained that the trade war was clearly beginning to have an impact on other economies, particularly among emerging and developing countries. Signs that support that conclusion, the report explained, are the easing of business confidence; declines and higher volatility in the major equities markets; slowing manufacturing; and decreasing export orders.
All of those signals were also apparent in recent domestic data. The Philippine Stock Exchange index (PSEi) seems to be recovering now from a period of declines toward the end of 2018, but remains vulnerable to the swings in global market sentiment as it exhibits more volatility now than it did a year ago.
Manufacturing output, while still expanding, is doing so at a progressively slower rate. In November, manufacturing production rose by just 2.1 percent, the slowest growth in a year, and the fourth straight month of easing growth rates.
Exports are declining as well, contracting by 0.3 percent year-on-year in November according to data released by the Philippine Statistics Authority on Thursday. For the 11 months to November 2018, exports were down 0.9 percent, against the January-November 2017 period.
None of these indicators suggest that there is an economic crisis, of course. The PSEi has not fluctuated as badly as other regional and world markets. Manufacturing output growth is slowing, but it is still, in fact, growing. And the retraction in exports, while not good news, has been relatively modest to this point; the country’s expanding trade deficit is being driven by sharp import growth more than anything else, which is a positive economic sign.
As we saw with last year’s worrisome acceleration in inflation, external factors — such as oil prices — which are entirely beyond the control of our policymakers, do have an impact on the economy. In the case of inflation, however, the effects of external factors were overestimated to a degree; the government belatedly realized that internal factors such as higher taxes and shortages of some staple commodities were having a bigger impact than originally thought. Once this was understood and monetary and non-monetary policy measures implemented to counteract the effects, inflation began to stabilize, but only after some months of unnecessarily higher prices had passed.
The relatively strong local economy may mask the negative impact of trade war-affected indicators, or in other words, produce the opposite reaction than the one that led to difficulties in controlling inflation. Strong emphasis on growth of capital imports and muted acknowledgment of the decline in exports by officials commenting on the latest trade data suggest a dismissive attitude toward global risks.
That may be an imprudent judgment, if that is, indeed, the perspective policymakers are taking. The time to act to counter the potential risks from deepening global uncertainty is now, while the Philippine economy is still as strong as it is, rather than later. That way, the nation can be assured that we can weather whatever conditions the rest of the world throws at us.