Hard times ahead?

If you listen to Junior and some of his economic advisers, the economy is doing well and they are optimistic about its future. It is almost as if we are not part of the world economy that is falling apart.

While it is true that our economy is basically driven by domestic consumption, it doesn’t mean we won’t be badly affected by developments offshore. For one thing, we import a good part of what we eat and many other things we need daily. And OFWs and BPOs, our principal sources of dollar earnings, can be affected by adverse international developments.

It would be nice if there was some acknowledgement of the challenges we face and what is being done to protect us from a meltdown in the world economic environment. There is probably little we can individually do, but at least we can make provisions for basic needs.

Experts say the probability of a global recession next year has increased. High inflation will discourage consumer spending, and central banks are hiking interest rates.

Fitch Ratings said the US economy will face a recession starting the second-quarter of 2023, but robust US consumer finances will help cushion its impact.

The United States may tip into a recession next year, but it is possible that inflation can be tamed without causing too much economic pain, Goldman Sachs CEO David Solomon told
Reuters. JPMorgan CEO Jamie Dimon expressed caution about the economic outlook.

A lot also depends on central banks minding price stability, dealing with inflation, and not worrying about growth in the meantime. After all, as former BSP deputy governor Diwa Guinigundo observed, “keeping prices stable is expected to lead to a good trajectory of growth and employment.”

However, in the light of Finance Secretary Ben Diokno’s statements about keeping the exchange rate below 60, one wonders if the BSP will be forced to pander to Malacanang when science and independence should be primary considerations in monetary policy decisions.

Indeed, Sec. Ben was forced to clarify and issue a statement that the national government is committed to keep the BSP independent, given the backlash from his statement in Bangkok. Junior said his government is ready to defend the peso, which explains why it is stuck at 58 to 59 to $1.

The other point Diwa brought up was the need for central banks to do the right thing at the right time. This is why, he said, “central bankers should always be discreet before they conduct open mouth operations. This is the reason why clear forward guidance is treated like another monetary instrument.  Otherwise, society will be suspicious of their competence and credibility. That is how to lose the fight against inflation.”

Our economic managers must be alert to the strong probability of a world recession. If you ask economist Nouriel Roubini, expect the worst ever with the most pain. Roubini is best known for predicting the 2007–2008 subprime mortgage crisis in the United States and the subsequent global financial crisis.

Here are excerpts of his interview in a Bloomberg podcast.

“Today the problem we’re facing is that if you fight inflation, not only are you going to have a recession and the idea you’re going to have a short and shallow recession – plain vanilla, garden variety – is totally delusional… because we have amounts of debts like we’ve never seen before in previous recessions…

“Inflation is global and everybody’s tightening and therefore, we get the worst of the ‘70s and the worst of the GFC (global financial crisis or the period of extreme stress in global financial markets and banking systems between mid-2007 and early 2009). It’s going to be long, ugly, protracted with financial stresses, financial instability, and debt crises. That’s what we’re facing right now.

“So, what would the optimal response be? Try to avoid an unhinging of inflation expectations. But you have two problems if you do the right thing.

“One, you have a recession that gets nasty.

“Second you have a financial and debt crisis like you’ve not seen before. And that’s going to lead central banks to wimp out… and monetizing those deficits and wiping out the real value of nominal debt, long duration. The path of least resistance politically is going to be to monetize it, right?

“And therefore, to cause inflation and stagflation like the ‘70s…

“I don’t believe central banks when they say we’re going to fight inflation at any cost because they have a delusion of either a soft landing or a hard landing that is short and shallow, two quarters of negative growth and then you return to growth and easing. That’s not going to happen. It’s going to get ugly, the recession, and you’ll have a financial crisis…

“Well, the international repercussions for emerging markets is that many… are in deep, deep trouble… and they’re in trouble for several reasons.

“One, interest rates are rising in the US, in advanced economies. So, their interest rates and their spreads are rising even more.

“Two, their currencies are weakening as the dollar is strengthening. And unless you are a commodity exporter, mostly the guys in the Gulf who are making a fortune, everybody else among emerging markets tend to be, with few exceptions, a commodity importer, especially in Asia, but also in other parts of the world. And therefore, you also have a terms of trade shock. So, it’s a quadruple whammy.

“You have first of all the rise of interest rates in advanced economies pushing your interest rates higher. You have the weakening of your currency and you have a lot of dollar debt and the real value goes higher. You have a negative terms of trade shock and the slowdown of growth in the recession.

“… effectively the recession weakens your export markets, your own economic growth. So, it’s the perfect storm for the weakest emerging markets. And I would say a good two thirds of these emerging markets right now have these types of economic and financial fragility…”

Maybe Roubini is wrong. But what if he is right? Better be ready for the worst. If it doesn’t happen, that’s a bonus.

Boo Chanco’s email address is [email protected]. Follow him on Twitter @boochanco.