IN recent days, particularly since the announcement of the well-below-expectations 2.1-percent gross domestic product (GDP) growth for the Philippines in the third quarter of this year, the term “stagflation” has gotten much attention in the local media. A few credible economic experts, among them American banking giant Citi and S&P Global Ratings, have already declared the Philippines to be in a state of stagflation, or very close to it.
On the other hand, our own in-house economic nerd here at The Manila Times agrees with the view of Department of Economy, Planning and Development Secretary Arsenio Balisacan and economists at major local banks that, while the Philippine economy is not in great shape at the moment, it does not, by any means, meet a reliable definition of “stagflation,” and that encouraging the worries that condition would rightly cause are irresponsible.
Part of the problem is that there is not an “official” or scientific definition for “stagflation,” a politically charged term originally coined in a speech by Conservative member of parliament Iain Macleod in the United Kingdom’s parliament in 1965. However, since it is backed by substantial academic analysis, the most widely accepted working definition of “stagflation” comes from the United States National Bureau of Economic Research, which defines the condition as one in which GDP growth is less than or equal to zero percent (that is, flat growth or a recession), with the consumer price index (CPI, meaning headline inflation) equal to or greater than 100 basis points (1 percent) over the government’s inflation target; high unemployment is also a characteristic of stagflation, but that is a function of depressed GDP growth.
Using the US as an example based on that definition, of the 27 economic recessions experienced by the US since 1890, only seven of those actually were periods of stagflation; the most recent was in 1990–1991. Thus, stagflation is a relatively rare condition, and it is good that it is because it is extremely difficult to correct.
Curbing inflation usually involves the central bank raising benchmark interest rates, but the other effect of that is to discourage lending and investment, which works against raising the GDP growth rate, and as a consequence, increasing employment. Lowering interest rates or increasing wages can spur spending, but on the other, drives up inflation sharply, which increases the consumption side of the GDP equation but works to sharply depress the producer side. Governments have generally tended to work their way out of stagflationary cycles either by massively increasing government spending, or making small, gradual adjustments to interest rates, wages and fiscal incentives for investors.
The Philippines is not even close to being in a condition of stagflation. GDP growth in the third quarter was, of course, well below expectations and even the consensus estimate of economic analysts at 2.1 percent. While that is concerning, it is still positive growth; stagflation only occurs when growth is flat, or when GDP contracts on an annualized basis. Slower GDP growth has contributed to unemployment, but the effect has been largely incremental; the country’s unemployment rate climbed to 5.4 percent in September from 5.3 percent a month earlier, and was 1.6 percent higher than a year earlier. With the Philippine population and workforce expanding by about 1.6 percent annually, the indication is that, at worst, the country is not gaining in employment, but it is not losing significant numbers of jobs, either. And while differences among national economies should be taken into consideration, historically identifiable periods of stagflation have always had unemployment rates exceeding 10 percent.
Inflation, which rose to 7.8 percent year on year last month, is indeed a concern, as it is well over the 1-percent above target threshold that defines stagflation. However, in the absence of the other main indicator of economic contraction, inflation by itself simply remains a problem to be solved, rather than a sign that the Philippine economy is in stagflation.
Having said all that, we would certainly not characterize the Philippine economy as healthy. In order to ease the burdens of the cost of living and cost of doing business on Filipinos, a great deal of work needs to be done by policymakers and the Bangko Sentral ng Pilipinas to boost growth. That will be no easy task, but it will be far easier than it would be under actual conditions of stagflation, which fortunately do not exist here, at least not yet.
