The Philippine Online Chronicles

First of two parts

President Benigno S. Aquino III has described his first full year in office a fruitful year, citing the supposed gains in reducing poverty and corruption. Aquino claimed that he was able to increase this year’s budget for health and education without raising new taxes. This was supposedly due to savings from tighter procedures for implementing programs and projects. Savings also came from improved rice production that allowed the country to import less rice. As of September 2011, the President said government savings have already reached P42 billion.

Brighter New Year?

For Aquino, prospects for 2012 can only be brighter, repeating the favorite mantra of Mrs. Gloria Arroyo about the resiliency of the Philippine economy amid the global crisis. Better use of resources, and not underspending, Aquino said, has given government more fiscal space to step up spending for infrastructure this year. Officials have already announced the planned bidding of 16 major projects under government’s centerpiece program public-private partnership (PPP). Aside from infrastructure and agriculture, Aquino also pins his hopes on tourism. The Department of Tourism (DOT) has unveiled last week its new program “It’s more fun in the Philippines” in a bid to revitalize the industry. Together with agriculture, the President expects infrastructure development and tourism to be the lead growth drivers in 2012, which he hopes “will insulate us from whatever happens overseas.”

In fact, government is keeping its 5-6% target in gross domestic product (GDP) growth this year despite the global uncertainties. According to Cayetano W. Paderanga Jr., Director General of the National Economic and Development Authority (Neda), the target can still be achieved through increased government spending and full implementation of the PPP program. In fact, the country may even have a “pleasant surprise” if efforts to boost construction and services were successful. Note, however, that under the Philippine Development Plan (PDP) 2011-2016, the target annual growth is 7-8% to supposedly make a dent on poverty.

But the more bad news is that the brewing global economic implosion in 2012 could be much severe that what Malacañang is anticipating, with some analysts predicting a crisis even graver than the 2008 financial and economic crunch. And worse, the country is ill-prepared for the turbulent year ahead not only due to the misguided optimism of government, but due to the lack of a real policy shift towards the reorientation of the domestic economy.

Gloomy global economy

After selling the illusion that the global economy has started to recover from the 2008 crisis in the latter part of 2009, governments and institutions of the industrial world have been forced to recognize the hard reality that the crisis – described as the worst of the capitalist system since the 1930s Great Depression – is actually still unfolding. Some of them, like International Monetary Fund (IMF) chief economist Olivier Blanchard, are even warning about “the real possibility that conditions may be worse than we saw in 2008”.

Indeed, as noted by a recent article by Reuters, leading political strategists, academics and economists are predicting another round of global recession this year that may cause “political upheaval on a scale not seen since the 1930s” especially after seeing the extraordinary transpire in 2011 such as the unprecedented credit rating downgrade of the US.

Such pessimism is being fuelled by the weakening growth across the industrial world that started as early as the second quarter of 2010, which continued and hardened in 2011. For instance, real US gross domestic product (GDP), data from the IMF’s World Economic Outlook database show, rebounded from negative growth rates in 2008 (-0.3%) and 2009 (-3.5%) and grew by more than 3% in 2010. But after three quarters in 2011, its GDP growth decelerated to just 1.2 percent, according to data from the US Bureau of Economic Analysis (BEA).

The same trend is observed in other rich countries, with the IMF predicting that the collective GDP growth in 2011 of the G-7 countries (Canada, France, Germany, Italy, Japan, UK and US) will fall to 1.3% from 2.9% in 2010 (after contractions of 0.3% and 4.2% in 2008 and 2009, respectively). In the euro area, which has been facing a deteriorating sovereign debt crisis, the GDP is anticipated to further slow down to 1.6% in 2011 from the already weak 1.8% in 2010 (after growing by 0.4% in 2008 and declining by 4.3% in 2009).

Projections for this year are even dimmer with indicators showing that the euro zone “may be in a recession that could last well into 2012” (GDP likely contracted by 1.8% in the last quarter of 2011, said global financial institution ING) while there is a 50% chance that the US will fall into recession amid prospects of a European sovereign debt default. Japan has been in recession again in 2011 with negative GDP growth rates in each of the three quarters of the year. (See Chart)

Other important indicators such as employment data also paint a grim scenario, especially considering that the labor market situation has remained dismal even when the global economy was supposedly recovering in 2010. Unemployment in the euro zone remained at a historic high 10.3% as of November 2011, with 16.37 million jobless workers – the worst since the euro area started compiling such data in 1995, according to Eurostat, the European Union’s (EU) statistics agency.

Unemployment in the US, on the other hand, appears to be improving a bit as it declined to 8.5%, the lowest in almost three years, although it remains way above the pre-crisis level of 4.6 percent. Also, while the US economy added 1.6 million jobs in 2011, it still needs to create some 6 million more jobs to get back to its pre-crisis levels. Overall, the International Labor Organization (ILO), in its World of Work Report 2011, noted that the global economy needs to create nearly 80 million jobs in 2012 and 2013 to reach pre-crisis employment rates. But the slowdown in economic activity since 2010 suggests that only half of this may be created, and consequently, employment in the advanced economies will not return to pre-crisis levels until 2016.