Our worst fears have been realized.
On Thursday, August 6, the Philippine Statistics Authority (PSA) released its grimmest report yet on the economy.
The country’s output, as measured by gross domestic product or GDP, shrank by a record 16.5% in the second quarter of 2020 (April to June) compared with the same period in 2019.
This is very, very bad for several reasons.
First, we’ve never seen a GDP drop this big since the earliest quarterly data in 1981 (Figure 1).
This collapse even overshadows the nadir of the previous worst post-war recession during Marcosian martial law. Back then we suffered 9 consecutive quarters of negative growth from 1983 to 1985 – but nowhere in the vicinity of 16.5% in a single quarter.
In fact, you might say we haven’t seen a collapse this big since World War II.
Second, this recession breaks almost 3 decades of uninterrupted growth.
The last time we experienced a recession – using this strict definition – was in 1991, when a string of natural disasters, a power crisis, and political unrest pummeled the economy.
But if you look at the record, it takes a lot to bring our economy to its knees. Even during previous international crises – like the Asian financial crisis and the more recent global financial crisis – the Philippine economy didn’t fall into a recession.
Our economy has proven quite resilient for decades…until COVID-19 came along. Our economy finally met its match.
Third, you might say this crisis wiped out much of the economic gains during the Duterte administration.
If you distribute GDP among all Filipinos, each of us will get P38,328 in the second quarter. (This is also called GDP per person.)
That sum is 17.4% lower than the P46,534 each of us got in the same period in 2019. More tellingly, it’s almost equal to the average income each of us already enjoyed back in 2017.
In short, the average Juan today is no more prosperous than he or she was 3.6 years ago.
Fourth, our performance in the second quarter is also dismal relative to our ASEAN neighbors (Figure 2).
Presidential Spokesperson Harry Roque tried to sugarcoat the situation by saying we’re “not the only nation facing this situation. COVID-19 has had an adverse economic impact on countries like Singapore, Indonesia, the United States, France, Spain, Mexico.”
But Figure 2 shows that so far we took the worst hit among our neighbors.
Heck, Vietnam – one of the countries that acted most promptly and efficiently against the pandemic – even grew by 0.4% in the second quarter. (READ: Had Duterte acted earlier, PH economy would be safe too open by now)
Catastrophic and depressing as these statistics may seem, they were in fact hardly surprising. If you look carefully at the spreadsheets, the pandemic is really largely to blame.
No matter how you parse the data, the pandemic ruined our economy beyond recognition.
To see why, GDP can be understood as total spending in the economy. Figure 3 shows that consumption spending plummeted, dragging down growth by 10.7 percentage points.
As people hunkered down in their homes, refrained from going to the malls, stopped eating at restaurants, and began cutting their hair at home, spending on consumer items like clothes, meals, and haircuts took a hit – along with the incomes of the salesladies, waiters, and barbers that provide such goods and services.
This is key because for the longest time about two-thirds of our economy was made up of consumption spending.
Unless the virus goes away and people feel safe to go out and spend, our consumption-driven economy will continue to be in a rut – no matter how loose quarantine restrictions are.
Disturbingly, health and education spending constituted the biggest drop in consumer spending – as millions of students stopped going to school and people with all manner of health problems stopped availing themselves of various healthcare goods and services.
Investment spending crashed as well (pulling down growth by 13.9 percentage points) as construction projects and production lines for durable goods such as machinery and equipment at factories were halted.
Exports and imports plunged by 37% and 40%, respectively, as supply chains around the world got disrupted and orders for various tradable goods dried up. (The only reason net exports – exports less imports – “contributed” positive growth in Figure 3 is because exports plummeted less than imports.)
Only government spending contributed any growth at all (at 3.1 percentage points). Even so, this pales in comparison with the combined 24.6 decline of both consumption and investment spending.
A second way to dissect GDP is to see which sectors contributed value to it.
Figure 4 shows there was a surprise but minuscule growth of agriculture in the second quarter.
But the main drivers of our economy – services and industry – tanked and dragged down overall growth by 9.8 and 6.7 percentage points, respectively.
Services suffered the most. They were the first to go, being the most reliant on face-to-face interactions through which the virus spreads and thrives.
All sorts of services collapsed, including transportation, storage, hotels, restaurants, real estate, education. Only government services, financial and insurance services, and ICT sectors saw any growth at all (for instance, services where work from home is at all possible).
Meanwhile, in industry, manufacturing and construction were the biggest losers as factories closed and construction projects got derailed.
All in all, the recession wiped out about P820 billion in output in the second quarter, relative to last year.
The sheer magnitude of the recession we’re currently in exposes the absurdity of the response of Duterte’s economic managers.
For one thing, the economic managers continue to be obsessed with matters that should not at all be the key features of the pandemic response, such as credit ratings and big-ticket infrastructure projects. (READ: Why we can’t Build, Build, Build our way out of this pandemic)
More importantly, it feels as if the economic managers don’t want to rescue the economy at all. Their proposed solutions are disproportionately small compared to the extent of the crisis.
It’s like they’re trying to put out a burning house using a watering can.
To be specific, the economic managers’ brainchild, the Bayanihan to Recover as One Act, is an economic rescue package that includes just about P140 to P162 billion in economic aid.
By stark contrast, the economic losses we suffered in the second quarter were 4 to 5 times that amount.
The size of the proposed aid won’t be nearly enough for all the things we have yet to spend on, including emergency cash for poor families (there has been no follow-up to the 2-month emergency subsidy program in April and May), wage subsidies to replace the lost incomes of displaced workers, and zero interest loans for businesses (especially small ones).
For some reason the economic managers, led by Finance Secretary Carlos Dominguez III, are being overly, unreasonably stingy. Using a boxing analogy, Secretary Dominguez claimed during a joint briefing on August 6 that the country must “conserve” resources for the upcoming “rounds” of economic recovery.
But this fiscal conservatism is grossly misplaced. It will put us in more trouble.
The more businesses we allow to die and the more workers we allow to be laid off, the longer it will take for our economy to bounce back.
It’s bad enough that the Duterte government failed to contain the virus early on. It’s worse that government officials, safe and secure in their own lifeboats, are unwilling to throw life preservers out to all the Filipinos who’ve been cast into the sea.
Finally, the economic managers are still laboring under the dangerous, misguided notion there’s a trade-off between health and the economy – that somehow we can cheat our way out of this crisis by reopening the economy quickly.
In fact, there’s no such trade-off: the fate of the pandemic dictates the fate of the economy. (READ: Kalusugan muna bago ekonomiya)
This point is perfectly illustrated by the recent reinstatement of modified enhanced community quarantine (MECQ) in Metro Manila and nearby provinces.
Recall that government, invoking the economy’s plight, loosened quarantine restrictions in June despite the continued rise of new COVID-19 cases.
But now hospitals are overwhelmed and medical frontliners are exhausted. We’ve had no choice but to go back to stricter quarantine measures amid the loud and desperate plea of myriad health workers.
The drawback, of course, is that this will invariably hurt many sectors of our economy again, including retail and transportation.
Until new cases are minimized or brought to zero, the next wave of cases is just waiting around the corner, and more and more of these extremely costly lockdowns will be unavoidable.
The intricate link between health and the economy was further underscored by another milestone on August 6. Not only did we learn then about the recession, but we also overtook Indonesia to have the most number of COVID-19 cases in ASEAN.
Somehow, when it comes to the economy and the pandemic, we now have the worst of both worlds.
Until Duterte and his economic managers learn their lesson and prioritize Filipinos’ health over the economy, there will be no end to our collective misery. – Rappler.com