Whirlpool

It is disturbing that all the economic numbers released the past week defied forecasts – not by little but by much.

Inflation for April was forecast at a little over five percent. The final number turned out to be 7.2 percent – with little sign of abating in the next few months.

GDP growth rate is forecast to be between four and five percent. Government’s fighting target remains an economic expansion of five to six percent. The official growth rate for the first quarter of this year is a mere 2.8 percent.

In sum, inflation is rising faster and the domestic economy is growing slower. This is the classic definition of stagflation.

Our economic managers will not admit we are headed towards stagflation. But all the signs tell us we may already be in this condition. We need to devise and execute a plan to pull our economy out of it.

Enough of the bureaucratic crap trying to lull us into complacency by assuring us “the fundamentals remain strong.” The fundamentals matter when the economy is operating normally. They matter little when the whole economy is overpowered by the dynamics of stagflation.

There is beautiful word from physics: synergy. The whole is larger than the sum of its parts. The combination of drivers produces a force stronger than the sum of each.

Imagine a whirlpool. It is caused by the interaction of opposing currents. But it generates a force stronger than the sum of the interacting currents.

Or a black hole in cosmic space. It generates such invisible force that it is able to eat up galaxies in an instant.

Stagflation is both whirlpool and black hole. It generates its own forces. It bends the behavior of everything else around it. Eventually, it generates enough fear that this emotion becomes the governing logic.

Normally, high inflation is associated with economic expansion. Stagflation alters that. Inflation rises even as the economy stagnates. Supply and demand interact in a weird way.

During a normal inflationary episode, consumers spend as soon as they make the money. This is rational from the consumer point of view. They want to avoid higher prices in the future – even if unmitigated spending contributes to pushing those prices higher.

During stagflation, consumers hold on to their cash for fear of having no incomes in the future. Companies hold on to their capital instead of investing, hoping to avoid cash deficiency down the road. Consumption freezes. Capital expenditure dissipates. Inflation rages even as economies stagnate.

It is easy for economic policies to go awry. When interest rates are increased, it causes the economy to stagnate. When governments resort to pump-priming the economy, this causes inflation to rise.

When stagflation begins to take hold, the phenomenon confounds policymakers. This economic episode imposes the highest challenge on economic statesmanship.

In the wake of war in the Middle East, our government declared an “energy emergency.” From the very first day, we delimited the definition of the challenge we confront. In the minds of our policymakers, the task at hand was simply to ensure adequate energy supply, given imminent breakages in global supply chains.

This is nonetheless a valid response. No government wants to ration fuel and reap the political consequences of doing so.

But the broken supply chains inevitably result in a higher oil price regime. There is nothing we can do to stop price increases. We are too small an economy to influence global trends.

The resulting price shock invariably creates something vaguely called “second-round effects.” We know what that consists of: possible business closures, a spike in unemployment, a reallocation of consumer spending away from what is discretionary and possible shortages of essential things like food.

I have worked with the bureaucracy long enough to understand that the first impulse is often to downscale an emerging problem. Defining down the problem results is lesser work. Defining up the problem imposes impossible tasks. The first reflex is to manage expectations.

The bulk of our government’s efforts the past few weeks of crisis went to managing expectations. Much was made of our success in procuring some amount of oil for our needs. Little was said about our inability to build a strategic oil reserve simply because we have no place to store it.

The registered drop in our GDP growth rate was due to two things that happened last year: the public works scandal that torpedoed business confidence in our economy and the cancellation of infrastructure spending which is the principal driver of our domestic growth. These two things would have brought down our growth rate even if the war did not happen.

Yet, despite its adverse impact on our economy, punishing those responsible for stealing an estimated P1.7 trillion in taxpayer money proceeded very slowly. There is no haste in restoring public spending for infra that plays a vital role in fostering growth.

The miserable growth posted for the first quarter, therefore, does not yet include the “second-round effects.” When these effects happen, our ability to grow will be further undermined. Given that so little has happened in term of penalizing those involved in the public works scandal and in hurrying up public investments in infra, we cannot expect the numbers to improve in the succeeding quarters.

We are moving too slowly and too unimaginatively in addressing our country’s torments.