After recession, PH must prepare for ‘slowflation’

AdChoiceTV News — As the economy makes a deep nosedive, inflation is heading north at maybe a worrying speed.

It’s an ugly combination that economists termed as “stagflation”.

But President Rodrigo Duterte’s top economic manager Karl Chua had signaled last Friday that there’s a chance that — by the second quarter — the Philippines could be pulled out of the recession it sank in. That means the economy is not as distressed to warrant the use of term “stagflation” to describe where it is going.

But still not a smooth sail this 2021. The Philippines is headed for rough economic waters, with economists flagging rising prices of pork, food and oil as headwinds working against its recovery.

ING Bank senior economist Nicholas Mapa warned of “slowflation”. Others label it “slugflation”. Both mean fragile economic recovery wobbling amid higher cost of goods and services.

“Just when we start to see positive growth by the second quarter of this year, we expect also to see inflation threaten the topside of the BSP’s inflation target,” Mapa said in an interview over the weekend. “So inflation really throwing a monkey wrench into that recovery story for the Philippines.”

The Dutch financial giant forecasts inflation to peak in the third quarter at 3.8%, before ending 2021 at an average 3.6%, close to the higher end of the central bank’s official 2% to 4% target band. Already, the Bangko Sentral ng Pilipinas (BSP) has penciled in the likelihood that inflation could breach 4% as early as January.

Inflation last year averaged 2.6%, settling within what the monetary authority had aimed for, but largely helped by oil prices falling to multi-decade lows. Economic growth, meanwhile, was a negative 9.5%, the worst since wartime era.

Inflation takes the spotlight in this whole debate about recovery because the economic team was banking on consumption to rev up the economic engine. When prices become unbelievably high – just like when pork in the wet market doubles to P450 per kilo and eggplant to P200 per kilo – consumers’ money, assuming they still have jobs, will have little value.

Monetary or fiscal response?

Traditionally, central banks contain inflation by raising borrowing costs to tame demand so that not too many money will be chasing too few goods. But this year’s inflation is a different monster – not demand-driven.

“The inflation this year will be cost-push driven therefore any sort of policy action from BSP will have very little effect,” Mapa said.

“It will be very counterintuitive if we see the BSP pushing up interest rates or the borrowing cost at a time like this where the economic recovery is in a very fragile stage so we’re not expecting any action from the BSP mainly because it will go against their directive to try to provide the economy a boost at this moment,” he added.

Real interest rates have already fallen to negative territory after the Philippine central bank slashed policy rates by a total of 200 basis points in 2020. The overnight reverse repurchase, lending, and deposit rates have been reduced to all-time lows of 2%, 2.5%, and 1.5%, respectively.

That low interest regime would have been an incentive for businesses to borrow cheap and expand to rehire those they had to let go at the height of the coronavirus pandemic. But that has yet to be felt. Millions still are left without jobs.

“Much has been done on both liquidity and interest rate support but look what happened to the weak credit and liquidity growth,” former BSP Deputy Governor Diwa Guinigundo said in an interview with AdChoiceTV News last Jan. 30.

“It’s important for monetary policy to stay put, consider pausing and monitor inflation dynamics moving forward,” he added.

With the central bank having little scope to use policy rates as a tool, much of the burden now lies with fiscal authorities.

“The right answer or the right solution to this upcoming spike or current spike we’re in now is for our fiscal authorities to try to improve or increase the amount of supply of these food items in the system,” Mapa said.

Efforts to boost local pork supply are underway with a plan to cut import tariffs.

Unlocking Generation Z consumption

Economic managers, mainly the Trade department and the National Economic and Development Authority (NEDA), have been peddling the prescription that allowing minors to go out of their homes and spend would give consumption a big lift.

Together, parents and their kids could contribute 50% to non-essential spend, the NEDA reckons.

So the economic team, in separate remarks last week, sounded disappointed with President Rodrigo Duterte’s orders to keep this cohort of consumers still locked up at home.

“The government or authorities are of the opinion that the only thing holding back the economy, the only thing holding back the growth numbers, would be the restrictions. I am not of that camp mainly because of the job losses,” Mapa said.

Lending credence to that reasoning is the fact that even if more people go out, rising food and transport prices could discourage them from spending, thus circling back to the argument of addressing inflation and jobs generation.

Generation Z, even if locked up at home, apparently are moving to save the economy. Generose De Bauden recounts how her eight-year old daughter Rhiana shops for gadgets, food and shoes online via Lazada.

“Nagugulat na lang ako, ipapakita niya: Mama, eto babayaran mo,” de Bauden said.

[Translation: She will just surprise me with the bill.]

Minors don’t own credit cards. So online sellers have turned to cash-on-delivery arrangements to corner this growing market of young shoppers. But with online retailers sprouting here and there, some wrinkles emerge too.

“Iba order ko, ang dumating sa akin umbrella. Pero nag-sorry naman sila. Yung payment binalik naman,” Rhiana’s mother said.

Newcomers in the digital retail space promise to guard kids against abuse.

“Children can enjoy the shopping with privacy protection of course. Go Shopping Philippines does not have any vulgarities in it. We don’t have sex toys showing in our platform. It’s purely going to be a child-friendly environment,” Neil Garcia La-as, CEO of Go Shopping Philippines, said.

The government regulator, DTI, has a warning.

“Both businesses and consumers will have to be very careful,” Trade Undersecretary Ruth Castelo said. — via Albert Rovic Tan / AdChoiceTV News

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