Is the economy on the mend?

There was a lot of positive economic news last week that’s music to our ears. Locally, a survey of the Bangko Sentral showed that business sentiment has turned positive. Business optimism is at its highest in over a year with responding firms claiming to expect hiring more, expanding operations, and in general, earning higher profits. BSP’s respondents are confident economic growth would continue to accelerate towards the end of the year.

Of course the other important bit of good news is the report of our economic statisticians that our economy “has effectively avoided a recession.” That is so because the Philippine economy as measured by the gross domestic product (GDP) expanded 1.45 percent year-on-year in the three months to June.

If that key indicator had been down, our economy would have been considered to have fallen into recession. The GDP growth in the second quarter was down from the 4.2 percent recorded in the same period last year. Two consecutive quarters of quarter-on-quarter contraction in GDP signal a recession.

So, are we out of the woods? The honest answer is that no one really knows for sure whether we are talking of the Philippines, the US or the world economy. There are just too many things to consider before we can pop the champagne bottle and congratulate ourselves for having survived the worst economic downturn since the Great Depression.

It is heartwarming to know that the mood of our entrepreneurs has turned positive because that could spur them to stop hoarding cash and start investing to get the economy really moving again. I assume they have first hand knowledge of the situation on the ground. Their more optimistic mood must be based on first hand experience of improved demand for their products and services.

Yet I wonder if the optimism they expressed to the BSP nose counters was just so much whistling in the dark… so much wishful thinking. I heard that the June and July sales of Jollibee, for instance, are still down. And those are the school opening months which should normally herald increased sales.

If you talk to the real estate people from Ayala and Rockwell, you are bound to be infected with their brimming optimism. I heard some of them were bold enough to launch selling missions to the Philippine communities in California, the epicenter of America’s economic crisis.

Here at home, you hear stories about empty floors in some of the top buildings on Ayala Avenue. RCBC Plaza is said to be harboring at least a dozen empty floors. Enterprise Center has at least half a dozen empty floors. I am told that rental on Ayala Avenue can be negotiated for as low as P600 per square meter, at least 50 percent discount from the usual asking price.

In the US, an article on the CNBC website last Friday asked: “Was the market rally a dream come true? Or is it about to become a terrible nightmare!”

The article noted that “over the past month the Dow has soared nearly 500 points and as of Thursday afternoon, it had made gains for eight consecutive days. But now investors are starting to worry that a correction could be around the corner and they fear the downturn has the potential to be steep.”

Why are some people on Wall Street getting jittery despite the abundance of positive market sentiment?

According to CNBC, they are worried that the volume is not as strong as it appears. “The stocks changing hands at the big board aren’t your big slugging blue chips but rather, weaker bench players like Citi (+9.07 percent), and AIG (+26.93 percent).”

Then, they are also worried that “the recent good housing numbers have a weak foundation with government incentives, especially the new homebuyer tax credits, artificially boosting prices. (Government stimulus spending could also be behind our positive GDP number and therefore, may not be sustainable).

Finally, they are doubtful about some of the positive reports from China. They are worried “China may be juicing its economic numbers leading investors to factor in a demand for raw materials that’s just not there.” They are pointing to the recent sharp drop in the Baltic Dry Index will mean more troubles for the US economy, despite recent signs of growth that have led some to call the recession over.

The BDI is a gauge of shipping activity along 20 of the world’s busiest routes used as a leading economic indicator to gauge demand for goods. Economists developed the BDI in part as a buffer against historically dubious economic data from China. If by the end of September, October the BDI doesn’t move up, it would be one of those barometers analysts would use to question the global recovery thesis.

For the moment with reference to US stock market activity, CNBC’s Bob Pisani counsels his readers “what we are seeing here is churning around on light volume. It is best to avoid making grand pronouncements about market trends on this type of trading”.

Then, there is Nouriel Roubini, one of the few economists who accurately predicted the magnitude of the world’s recent financial troubles. In an article on the Financial Times web site, he warned of a “big risk” of a double-dip recession.

Roubini, a professor at New York University’s Stern School of Business, said that US and western European economies will likely experience “anemic” and “below trend” growth for at least a couple of years. There is problem of rising budget deficits that must soon be confronted.

Yet, there are no easy solutions. If they raise taxes and cut spending, they could undermine any recovery. But if they do nothing about large deficits, worries about excessive inflation will grow, causing bond yields and borrowing rates to rise and perhaps choke off economic growth. The road ahead is clearly perilous.

Another reason to worry cited by Roubini “is that energy, food and oil prices are rising faster than fundamentals warrant, and could be driven higher by speculation or if excessive liquidity creates artificially high demand.” He said the global economy “could not withstand another contractionary shock” if speculation drives oil rapidly toward $100 per barrel. US crude oil futures inched closer to that level as it traded Friday at about $73.83.

For us, the other big risk factor investors worry about is our politics. We are at a very delicate political crossroad where despite protestations to the contrary by Ate Glue, there are persistent fears that she and her allies will try to stay in power beyond June 30, 2010… by cha cha or by coup.

Thankfully, talks of a Senate-less charter change have abated following the public reaction to the death of former President Cory Aquino. But fears have now focused on a failure of elections because there is little confidence Comelec will be able to implement a smooth computerized electoral process.

Assuming the computerized polls turn out well, investors will now have to figure out how the new President and political party in power will impact on the business climate. Based purely on my subjective assessment of business sentiment, it makes a big difference for investors if a Mar Roxas or a Manny Villar wins rather than a Noli de Castro or worse, a re-elected Erap.

A large outpouring of support for Noynoy, similar to what Tita Cory herself received, should help produce a positive business sentiment. Noynoy’s supposed lack of preparation for the Chief Executive’s job is being seen as something similar to his late mother’s situation in 1985-86 and will be compensated by his perceived clean reputation. Fighting corruption is after all, a major concern of business all these years. Noynoy is seen as someone who does not have any other agenda than public service and he can also be expected to lead by example.

But until things firm up to a point that our political landscape can be declared generally safe and even encouraging, both local and foreign investors, the kind of long term investors we need to create jobs and economic growth are likely to remain in the background nursing their cash hoard. There may be bets made by hot money portfolio investors in our local stock market but those are very volatile funds that go in and out quickly.

I guess we can only say that our economy today appears less bad… and can only become really good if we sort out our political problems well. Hopefully too, the world economy also finally clears itself out of the financial hole it dug itself into through timely policy moves and smart regulation.

Junketing officials

This one was e-mailed by a Pinoy expat in Spain.

NEWS FLASH: A plane carrying all the Filipino leaders, administration and opposition, crashed into the sea.

The question was asked by a journalist… who survived?

Answer: The Filipino people.

Boo Chanco’s e-mail address is [email protected]. This and some past columns can also be viewed at www.boochanco.com