US looming deflation: Paving the way to RP's unemployment rise

It has been weeks that prices of oil have gone down considerably in the world market. Similarly, it has been weeks that oil retailers have been enjoying the price drop. Unfortunately, these opportunists (oil retailers) have, so far, showed nothing but token reduction in oil retail prices. Unjustly dealt, we (the hapless consumers) aired our grievances against these opportunists for taking advantage on our helplessness. 

Unmindful of the severity of the economic pains their fellow hapless citizens are in, drivers and operators have also remained adamant in reducing fares commensurate to the token reduction in prices reluctantly given by the oil retailers. As it stood, we shall surely continue to gripe against these heartless opportunists for as long as the feeling of betrayal subsists.

In the meantime, however, we shall set aside this issue before wild emotions flare up. As rational beings, let us look into the other side of the sharp decline of oil prices in the global market. Just a few weeks after its meteoric rise to nearly US$150.00 per barrel, oil is now in the US$70.00 per barrel level.  Its price decline is never difficult to comprehend. It is primarily due to a sizeable drop in the demand for oil in the USA. Undeniably, the world’s biggest consumer is the USA. They consume more than 20 million barrels a day or more than ¼ of the world’s output. Therefore, demand for oil is largely influenced by USA’s industrial and personal consumers’ behavior. 

Precariously, the USA is in dire economic crunch today. All indicators point not just on recession but deflation as well. With its sheer size, its ongoing economic turmoil traverses all over the globe. Manufacturing and financial companies are closing down. Foreclosures of mortgages remained unabated. Consequently, economic activities like manufacturing have largely slowed down. As these manufacturing outfits used to consume sizable quantities of oil, its demand therefore has substantially dropped.

On the other hand, as 88% of the US workforce travels by car, a sizeable chunk of the country’s consumption is eaten by this sector. As more of them are losing jobs and are opting to use public transport instead, their oil purchases have considerably dropped as well. 

Despite having cheaper oil, this situation is not worth rejoicing at all. On the contrary, this is a very precarious economic condition. The cheaper price brought about by the absence of demand makes deflation not just possible but inevitable. An economic condition that obtained during the 1930s universally referred to as the Great Depression, this is the same situation that prevailed in Japan since 1990 until the middle of this decade. 

As an economic indicator, though prices are still up 4.5% over the past twelve months, the US Consumer Price Index, the government’s key inflation measure, did show no rise in prices in September. Even Bernard Baumohl, executive director of the respected Economic Outlook Group of the USA, puts the risk of deflation about 10% to 15%, and no more than 20%. But, more importantly, he said that only a month ago he would have thought the risk of deflation was less than 5%.

Something new to this generation, dictionaries in economics define deflation as a “situation where there is a general decline in prices, often caused by a reduction in the supply of money or credit. Deflation can be caused also by a decrease in government, personal or investment spending. The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression.”  

While cheaper prices maybe a happy development, its darker side is more catastrophic. If these will persist, the decline in prices will generally create a vicious spiral of negatives such as falling in profits for businesses, to closing of more factories which will surely lead to unemployment, diminishing of incomes, and increasing defaults on loans by companies and individuals. 

 To most of us, struggling Filipinos who have been so bitter about high cost of oil and food might even think that the idea about deflation is so attractive. However, economists generally agree that this is entirely not just bad news but could be worst to some extent. 

Why? When deflation pervades in the USA, our economy will certainly suffer. When prices start to fall because of lack of demand, prices will likewise drop. It shall drop to a point where manufacturing companies in the USA might find their production costs higher than the selling prices. Therefore, companies will have no other alternative but to cut back on production. Once production targets are cut, some factories may have to close. Consequently, unemployment rises. As the list of unemployed individuals rise, even the demand for the consumer products will certainly decline.

When deflation persists, as an exporting country to the USA, we shall also suffer. We shall find no market at all for our products. If there is, prices will be unprofitably low. As the USA buys all over the globe, therefore the global economy suffers as well. Obviously, therefore, we can’t count on countries in Europe, like Germany, Great Britain, France and Russia. Neither can we count on Australia and other affluent countries in Asia as potential customers. Remember, the Middle East, a supposedly potential buying region, will also be severely affected by the drastic oil price drop. 

Finding no market for our exportable products, our manufacturers shall consequently cut production targets. In doing so, they shall close factories and worst, fire employees. With a growing list of unemployed and, therefore, penniless Filipinos, demand for local products will surely decline. Thus, even companies that are just supplying the local market shall suffer as well.

On the other hand, it wouldn’t be entirely bad at all. The OFWs’ beneficiaries’ purchasing power will remain strong. Since most of OFWs are into health-related employment, they wouldn’t be much affected by any wholesale termination. 

Obviously, amidst this economic turmoil, this is the only sector we can count on. This is the only sector that will surely sustain our economy. As always, they will be the solitary light in this looming economic turmoil.

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