Longer ECQ, longer economic recovery

The long title of this column is, the longer and stricter the ECQ, the deeper the economy will fall, the longer and harder it will be for the economy to recover, and the more economic suffering for the people. This is obvious to all the governments all over the world, that all are now scampering to ease up on the lockdowns in the hope of re-starting their economies. Facing a worldwide depression more severe than in the 1930’s, with Global GDP shrinking by $7 trillion, additional unemployment in the hundreds of millions, and stock markets losing half of its valuations, to say that the world is in trouble would be an understatement.

In the same way that the Covid-19 pandemic did not hit uniformly all the countries in terms of infections and death rates, the economic impact and recovery will also vary from country to country. The level of economic development, the competence of their leaders, the structure and distribution of the economic resources, the fiscal/monetary condition of the country, the form of government and the temperament of the people will determine the ability of the countries to recover from the pandemic and its economic effects. Setting aside the rest of the world for another time, let us focus on the Philippines.

The economic data for the Philippine economy was just released last week, and the Philippine economy contracted by .2 of 1% in the 1st qtr. This is only for the first 3 months of 2020 and it included only a one-week effect of the Lockdown. According to Finance Sec. Dominguez, every week of lockdown would decrease GDP by ½ % so if we are already 8 weeks into the lockdown, expect a 4% reduction in the coming quarter. So, he expects a deeper contraction in the 2 nd quarter and a negative GDP growth for the year even if we recover in the 3 rd and 4 th quarters. And this is already with the P220 billion that the government is giving as dole out to the poor, the disbursements of the local governments, government corporations and the enormous financial assistance of the private corporations/business and individuals.

As stated by Sec Dominguez and BSP Governor Diokno, the Philippines is in a much better fiscal and monetary situation compared to many countries in addressing the economic effects of this pandemic.

Our Government Debt as a proportion to GDP at 45%, and fiscal deficit at 3.8% of GDP is even better than that of the U.S., Japan and many countries. This means we have more leeway to borrow from local and foreign sources because of our credit rating/standing, and our ability to pay is better. This is however, an “As of” or point in time condition and our ability to pay depends also on the recovery of our economy over the medium and long term. This is where the structure, distribution and the implementation of corrective measures on the economy matters.

The Philippine economy is 70% consumer demand driven, the remaining 30% by investment and government spending. The consumer demand is propelled by the 90% middle class and lower class and these are the classes that are getting badly hit by the lockdown depriving them of earnings/purchasing power. So, this is depressing the demand side of the economy that cannot be replaced by the P5,000- P8,000 for two months that the government is doling out to 10 million out of the 95 million Filipinos living in the Philippines. The people have to get back to earning a living again in their businesses or get their salaries from the companies that will survive. Mandated subsidies will not last forever as no government can sustain it for that many people for a long time. Free enterprise has to be revived to ensure the interaction of “Demand and Supply” that will grow the economy. The best designed government supply chain/logistics mechanism, will never replace the supply chain network that are established by the profit- oriented businessmen/merchants who want to sell their goods and services to meet the demand of the consumers at the right place, at the right time, and at the right price.