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A senior government from the central office of the National Economic and Development Authority says the “Philippine economy is expected to grow by 6.1 to 7.1 percent in 2009, accelerating from 5.5 to 6.4 percent this year, as external demand recovers and consumption increase, while inflation is also expected to average at 6.0 to 8.0 percent next year from 9.0 to 11 percent this year.” The forecast is also found in the 2009 spending plan, in which where the Office of the President is asking Congress to approve its P1.415-trillion budget for next year. The proposed budget is higher by 15.4 percent from this year with an assumed budget deficit of P40 billion.
It is not certain how the government will meet its 2009 growth target, which is very much above trend, as far as the country is concerned. Last year’s 7.2 percent expansion was fueled more by the election related rise in private and government expenditures. This year, the expectation is for the economy to slow down because of the impact of high oil prices and inflation, including the rapid increase in food prices, which is very painful to a third of our people whose income fall below the poverty line and those hovering just above it.
The United States is still unable to overcome its housing and sub-prime loan market mess, causing its economy to slow down. This in turn is now affecting many countries in Europe and Asia, including the Philippines, that have close investment and trade relation with the US. With this, it is possible that we may not even reach the low end of our growth targets this year and next year. Inflation, which had been low last year, is now much higher at a two-digit level. This is not surprising given our past and the supply rigidities or market imperfections in our system.
So we have two basic problems to solve — the economic slowdown and inflation. To each, the government has an array of tools to use, like raising the level of government expenditures to pump-prime the economy in the case of the first problem or raising the rate of interest in the case of the second problem to reduce demand. Unfortunately both cannot be undertaken at the same time as they cancel each other’s impact. On one hand, higher government expenditures, which the present administration is applying this year and next year, with its decision to postpone balancing the budget to 2010, will create the pressure for prices to rise. On the other hand, high interest rates, which the Bangko Sentral ng Pilipinas (BSP) is now orchestrating to rein in demand and inflation, will also slow down investments, thus making it harder for the government to meet its growth target.
In the US, inflation is also a problem but the Federal Reserve Board is not inclined to raise its Federal Funds rate in order not to mess up further its already tightening credit market as a result of the sub-prime loan fiasco, and limit the impact of the stimulus fund that had been put into motion earlier this year by the federal government to prevent the deepening of the US economy. When the left hand of our government does something different from what its right hand is doing, we can be sure, that both our objectives of achieving higher growth and lower inflation rates will be sacrificed.
My feeling is that inflation is not much of a problem anymore as long as the world price of oil will stabilize between $100 to 120 a barrel or where it is now. At this level, we will still have high prices of basic goods in the market, but what is important is that the prices already stopped rising or are increasing moderately. Also, inflation has its way of dying out. When prices are already high, demand begins to taper off, unless we have an unlimited supply of cash. That, in fact, is the reason why the world price of oil is now down — people in the rich world are now traveling less and are economizing on their use of energy, similar to what they did after the oil crisis in the 1970s and 1980s.
In 1980s the world demand for oil had been so curtailed that the world price of oil was maintained at around $20 per barrel, which lasted up to the 1990s, except during the war in Iraq. It only started to rise when the economies of China, India and other emerging countries improved, with their people consuming more energy, including more and better food, which also contributed to the recent world food crises.
For the moment, therefore, I prefer that government focus more on growth objective by way of more pump-priming activities, especially to support agriculture production, which will also have the benefit of bringing down the prices of food, and building our infrastructure to make the country more attractive to investors. The BSP can do without increasing the interest rates as the last round of inflation already caused the real money balances of our people to be down also, thus curtailing demand. But if we must have growth, we should also not forget to make it inclusive to reduce our present inequity and the number of our poor people.
