Cebu's 2009 prospects depend on US performance

Talking about extremes, 2008 had everything. It saw the rise of oil prices to US$147.00 per barrel in the middle of the year and witnessed its plummeting to US$37 per barrel towards the end. Similarly, during the year, we saw the worst of the oil retailers who unjustly preyed on hapless consumers by denying them of the benefits of the price drop. If not for the strong condemnation from most sectors, such undue opportunism could have persisted. 

Then, the same can be said of the public transport. Apparently infiltrated by ideologues, they were then so adamant in reducing fares even if such will just commensurate to the token reduction in prices reluctantly given by the oil retailers. Consequently, even until now, consumers continued to gripe against these heartless opportunists for the feeling of betrayal that subsisted.

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 US$147.00 per barrel, oil is now in the US$37 to US$40.00 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. Recession is taking its toll unsparingly. Due to 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 sizeable quantities of oil, its demand therefore has substantially dropped.

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. This is 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. 

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.

2009, however, will be entirely different with an immensely popular president taking over the reins of the world’s largest economy. In the first two quarters of the year, we’ll certainly see the plugs that will stop the bleeding in place. By the third quarter, President Obama will have a stronger grip of the economy. By the fourth quarter, the US economy will start to rebound and the world will again start enjoying the benefits of the initiatives of President Obama and the democrats.

With the US economy back in shape, their domestic demand for essential and non-essential products will certainly prop up. Therefore, the long endured sufferings of our Cebuano exporters will hopefully cease. Also, outsourcing activities will certainly prop up.   Known as the top destination for BPOs, Cebu will certainly take a sizeable slice of the outsourcing pie. 

In both instances, Cebu’s employment rate will certainly increase. Once it happens, real estate developers will find their houses built too few for the rise in demands. Also, manufacturers of products for domestic consumption and retailers will find some solace, not just from the beneficiaries’ demands out of the OFWs’ remittances but from the locally employed benefactors as well. 

Frankly, 2008 has seen the rock bottom level and, therefore, there is no way that we go down further. 2009 is the best time to rise and there is absolutely no reason why we shouldn’t go farther.

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