The Philippines's consumer economy and Singapore's crisis

The Philippines’ 4th quarter GDP growth rate of 6.3 percent in 2015 should be a prelude to better and bigger things to come for the local economy in 2016. Despite the rather off target growth of 5.8 for the 2015, it does not fully speak of the performance of the economy in the previous year.

The last two quarters of the previous year show a more than 6 percent growth (6 percent in 3rd quarter and 6.2 percent in the 4th quarter), despite a pathetic performance in the 1st quarter at measly 5.2 percent, thanks but no thanks to the under spending of the government, that literally dragged the economy down the mark. The economic recovery during the 3rd and 4th quarter at more than 6 percent was primarily induced by a robust consumer spending that has always been the trademark of a developing economy, proving to all and sundry that ours remains a consumer-driven economy. Was there something to be ecstatic about? Think again…

Although other drivers of growth may have accelerated and fueled development just like the services sector that grew by 7.4 percent to complement government spending which grew by 17.4 percent (after waking up from a deep slumber), it was never consistent unlike consumer spending that constantly saves the day for our local economy. One thing going against a consumer-driven economy is the likelihood of the economy’s deficiency in savings. If we are going to examine the component of the local growth, 60 to 70 percent of our local growth is contributed by consumption spending; while the remainder is spent somewhere with a very small proportion going to savings, if there is anything left at all.

For an economy to make investment locally or otherwise, it must generate a considerable amount of savings. Remember that a big portion, if not the plurality of investment, generally comes from savings. It should be safe to assume that a country that lacks savings will borrow from other sources to fuel investment. Imagine an individual without any savings who then borrows money to invest; or put it in another way, a person borrowing money in order to save! It is an insane situation where an insane country will borrow money for the sake of inducing growth by way of investment spending, where in the long run, the country becomes a victim of its own indecisiveness. Local investment spending is still far from expectations; in fact even authorities admit that the government is having a difficult time attracting investors to pour into the economy—perhaps an offshoot of an unstable and volatile fiscal policy.

Local investment spending is still far from expectations; in fact even authorities admit that the government is having a difficult time attracting investors to pour into the economy.

The more complicated scenario is that we have an inflation rate of less than 1.4 percent in 2015, which by any standard is an ideal situation where the prices should have maintained its level. This was supplemented by the incessant cut in the oil prices that could have increased the level of savings. But the expected increase is not happening because interest rates have remained depressed. Is it a tell-tale sign of depression induced by outside forces that includes the China crisis plus the Middle East oil plunge where the threat of mass unemployment still persists? I hope not. Because the issue of depression is perhaps one of the most, if not the most dreadful, economic diseases this world has ever experienced in the past century.

The great depression of 1929 has persisted for almost a decade. It was preceded by the infamous stock market crash of 1929 where prices per share fell by as much as 23 percent in a span of few days. However, such phenomenon although already experienced primarily in the US economy, is farfetched locally and internationally mainly because of common interests and objectives that each country protects. Locally, it is not going to occur in the immediate future because ours is an economy highly influenced and dictated by the market forces outside our shores.

An economy that is hard-pressed to achieve a developed country status should have a GDP share in consumer spending less than 60 percent. As a consequence, more than enough is left in the pocket and households can translate to more productive activities like saving. Considerable portion of the GDP component should come from investment spending, which up to now remains elusive. If the country remains pretty reliant on consumer spending and does not develop long-term income sources like investment spending and industrializing the agricultural sector, we can kiss our bid of becoming an economic tiger goodbye.

If the country remains pretty reliant on consumer spending and does not develop long-term income sources like investment spending and industrializing the agricultural sector, we can kiss our bid of becoming an economic tiger goodbye.

Singapore’s economic slump

Singapore, which is known to be the biggest tiger in the ASEAN, is experiencing its worst economic decline in decades forcing economists to restructure its growth forecast the past year. From a projected 2-percent GDP growth rate in the 4th quarter of 2015, economists downgraded it to 1.4 percent. It was also calculated that the economy’s full-year estimate is at 2 percent, down from 2.1 percent.

The culprit to the worst crisis Singapore is experiencing was the decline in demand for the manufacturing sector. According to sources, last year's slump was due to excess supply and overcapacity. It was a glut not supported by demand. Money was cheap, and businesses manufactured in anticipation of much stronger demand, but not much as expected. What worsened the situation has been the continuous contraction of the economy that brought down the manufacturing sector coupled with the increase in interest rates that literally drove cheap money to savings, worsening the supply glut in the region.

Will this affect or influence regional economy? Find out next Wednesday.

Emmanuel J. Lopez is an associate professor at the University of Santo Tomas and the chair of its Department of Economics. Views reflected in this article are his own.  For comments email: [email protected]