DESPITE surging above the government’s threshold for the year at a time of economic recession, the recent inflation acceleration is transitory and can’t be considered “stagflation” at this point, according to a former Bangko Sentral ng Pilipinas (BSP) senior official.
In a response to the BusinessMirror’s queries, former BSP deputy governor for the Monetary Stability Sector sector Diwa Guinigundo said the upside surprise to price growth pushed some economists to raise concern, but inflation at this point is generally expected to revert to normal in the next few months.
“I don’t think we are in stagflation at this point. We are in probably prolonged economic slowdown because of the pandemic-induced scarring. Due to base effects, it is likely we could show some modest positive output growth this year and the next, but to say we could recover pre-pandemic growth levels this year or early next year might indeed be a little ambitious,” Guinigundo told the BusinessMirror.
“Yes, inflation for January 2021 at 4.2 percent exceeded the Government target of 2 to 4 percent but this is essentially supply- driven and is expected not to persist,” he added.
Stagflation is an economic term used when an economy is experiencing a relatively consistent high rate of price increases coupled with a stagnation in economic conditions, usually seen through high unemployment rates or contraction in a country’s gross domestic product (GDP).
Concerns about the Philippine economy hitting stagflation started to emerge on Friday, after the Philippine Statistics Authority (PSA) announced that inflation hit a two-year high rate of 4.2 percent in January.
This is in the midst of a weak economic backdrop as the country’s economic story has largely been on recession in 2020, as the Philippines reels from the containment measures used to curb the Covid-19 pandemic.
Out of a deep hole
Guinigundo’s view is shared by Moody’s Analytics chief Asia Pacific economist Steve Cochrane, saying the Philippines’s numbers may look bad at the moment but are expected to recover in the coming months.
In his response to BusinessMirror’s queries, Cochrane said supply-driven shortages—which are largely the cause of the January 2021 inflation surge—are “bound to happen” as pent-up demand is released into an economy coming off of quarantine.
He also said that while unemployment still has a long way to go to return to its prepandemic rate of about 5 percent, it is edging down.
“Stagflation is defined by a persistent period of high inflation, slow economic growth and high unemployment. The economy right now is quite dynamic and does not fit any of these criteria. The economy is emerging from the external shock of the Covid-19 pandemic that caused recession in the first half of 2020. The economy is growing its way out of that deep hole. It is not fully recovered, but it is on its way,” Cochrane told the BusinessMirror.
The international think tank’s economist further explained: “There is no guarantee that inflation will not accelerate as the economy recovers. Indeed, monthly inflation may be volatile as demand improves in the coming year. But domestic production will also increase and should eventually catch up with improving demand.”
Among the other reasons behind Cochrane’s view that “stagflation” is not hitting the Philippine economy yet is the breakdown of the inflation components in January.
“When one looks at the core consumer price index [CPI], which excludes selected food and energy items, ‘core inflation’ was up just 3.4 percent in January, which is largely unchanged over the past year,” Cochrane said.
“For lower income households that spend a high share of income on basic food items, inflation is low. The price index for rice is reported up by 0.1 percent, the same as December; and for milk, cheese and eggs the rate is 1.7 percent, also unchanged,” he added.
Things to track
Asked what metrics the Philippines should be looking for and what policy measures should be in place to prevent the economy from sinking into “stagflation,” Guinigundo told the BusinessMirror: “There is a mounting risk, however, that if the economic lockdown continues and production is more durably constrained and monetary policy remains excessively easy, high inflation could be entrenched far longer than necessary. This is a possibility even if domestic demand continues to be restrained if the global economy recovers faster than ours and oil prices continue to climb.”
As such, the former central banker said it would be “very helpful” for fiscal policy to remain expansionary for the time being.
“Given the dynamics of inflation and growth today, monetary policy might have to do more monitoring than more easing because the last thing we want to trigger is financial stability problems. Regulatory support and moral suasion for banks to be less cyclical are more useful during these times,” Guinigundo said.
Aside from the widely expected growth points of exports, remittances and business process outsourcing (BPO) receipts in the coming months, Guinigundo said high frequency data should be monitored including mobility indicators of Google, Apple and Waze; manufacturing activities based on Purchasing Managers Index (PMI); government and private surveys on business and consumer sentiments; as well as the stock and bond price indices.
Earlier this month, BSP Governor Benjamin Diokno said they are starting to adopt so-called user-based “mobility indicators” to track economic activity in the country, especially in relation to pre-Covid levels.
An early assessment from the BSP using Apple mobility data showed that the Philippines is among the slowest in the Asean-5 to regain its mobility in 2020.
As of December, the Philippines has the lowest mobility indicator followed by Singapore and then Thailand. Malaysia, Vietnam and Indonesia are already back to pre-Covid mobility levels.
The Philippines’s PMI, meanwhile, recorded strong growth in the first month of the year to hit 52.5, signalling a “solid uptick” in business conditions in the country, according to economists. This is the strongest performance of the manufacturing sector in 25 months.
“The overriding imperative is, therefore, pandemic mitigation: to flatten the curve through the usual health protocols and for the long run, mass vaccination. This is the fundamental prerequisite before we see a complete restoration of public confidence and get the economy going again,” Guinigundo said.