High economic growth: Surprised?
Business Mirror, June 5, 2007
By John Mangun
The first quarter economic growth is the
highest in 17 years. Why is anyone, especially the “experts”, surprised at
the nation’s performance?
I have been telling you for the past nine months that the Philippines was
doing great. Oops, there I go again trying to take credit, like some others
I know, for something I had nothing to do with.
Actually, it is the Philippine Stock Exchange (PSE) that has been telling
you and I and the world that the Philippines has entered a booming economic
period.
Have all the experts forgotten one of the important things that a stock
exchange does? The stock market is an important component of the “leading
economic indicators.” That means, what happens in the stock exchange becomes
clearly evident in economic numbers several months down the road.
The fact that economic growth roared in the first quarter should have been
expected.
Over the last year, interest rates have decreased to the lowest level in
modern Philippine economic history. When interest rates go down, money is
freed for other wealth-creating purposes like spending and expansion.
Furthermore, the money supply has grown significantly over the last year. An
increase in money supply, the amount of cash in the system, translates into
inflation and higher prices or investment of all types. And everybody,
including the “experts”, know that inflation is virtually at a standstill
despite very high fuel and energy costs.
Granted that all of these factors bear on one another, it is unlikely that
the stock market would rise in times of high interest rates and high
inflation. However, the 50-percent increase in the stock prices since July
2006 is the best indication of the favorable climate that the Philippines
has worked in for a year.
Analysts said that the 150-point increase in the PSE Index on Thursday and
Friday was in reaction to the “surprise” of the gross domestic product (GDP)
numbers.
Wrong. The 1,500-point increase was in anticipation of the first quarter
GDP. Thursday and Friday market action was primarily from people who missed
the 20-percent increase of stock prices in 2007 who suddenly jumped on board
the train that left the station in July 2006.
The most amazing quote I read about the market/economy was this: “The
market’s upbeat on higher-than-expected GDP growth that may translate to
robust corporate earnings growth in the next few quarters.”
I will not embarrass the person who said this by naming him or her. Why is
this comment so inaccurate? Simple common business/economic sense.
Look. Ask yourself this question: what is it that makes up the numbers that
create a 6.9-percent year-on-year increase in growth? Answer: positive and
profitable economic activity. Meaning, the GDP is high due to substantial
growth in corporate revenues and earnings in the first quarter. Where has
this person been hiding? Didn’t he/she see double-digit corporate profits
for each of the last two quarters?
The “robust corporate-earnings growth” created the robust economic growth.
Of course, there is another viewpoint. From the Inquirer: “While the markets
welcomed the higher-than-expected GDP growth, the research group Ibon
Foundation Inc. pooh-poohed the growth as superficial and largely due to the
‘scandalous campaign spending’ by politicians in the May elections. Ibon
research head Sonny Africa estimated the total campaign spending to be at
least P31 billion and as much as P50 billion.”
The total Philippines GDP in dollar terms is approximately $120 billion.
That means during every quarter, the economy generates about $30 billion.
Therefore, if the highest estimate of campaign spending of $1 billion is
correct, campaign spending contributed to less than 3 percent of the total
GDP.
However, the most important argument against the effect of campaign spending
is found in consumer-spending growth. The growth of personal spending grew
in the first quarter of 2007 at nearly the same rate as in previous
quarters.
The enlightening statistics that validate the GDP numbers are these. In the
first quarter, construction investment grew by 7.3 percent; merchandise
exports, 10.3 percent; mining and quarrying, 11 percent; and agriculture,
fishery and forestry, 4.2 percent. All these sectors were up significantly
from the last. And the PSE has been telling us for months that this was
going to happen.
Are these economic numbers for real? Just keep checking stock prices as a
very good indicator of what the economic future holds in store for the
Philippines.