World Bank Says The Philippine Economy Is At Risk Of ‘Overheating.’ What Does It Mean For You?

Since 2010, the Philippine economy has been on a steady upswing.

Touted as one of Asia’s fastest-growing economies, the growth rate of the Philippines’ gross domestic product (GDP) has kept a steady pace of an above six percent increase for six years in a row.

Philippine Economy

Last year, GDP went up by 6.7 percent due to public spending and the rebound of the agricultural sector. Despite the slowdown in the business process outsourcing industry, decrease in private construction spending, and post-election bearishness, the uptake only slowed down by 0.2 percent compared to 2016.

However, the World Bank hinted that the Philippine economy might experience overheating and cause a slowdown in terms of growth. With the threat of a slower economy a potential, what does it mean to Filipinos and how will this affect our daily lives?

Good news, bad news

Just recently, the World Bank published a report “Philippine Economic Update: Investing in the Future,” detailing key highlights in the country’s growth as well as the potential combo breakers that, if ignored, will halt the positive progress Filipinos have been enjoying.

With private investment becoming weaker, the multinational financial group said that it’s in the hands of the government to keep the steady pace of spending.

In addition to the challenge faced by the government in implementing its massive infrastructure programs, a key player in maintaining the country’s impressive upswing, the current administration should clarify the private sector’s role in its government programs.

“The implementation of the public infrastructure program is vital to the country’s growth outlook, as private investment is expected to weaken. Prudent fiscal management and the implementation of the government’s tax reform agenda could help secure the country’s fiscal sustainability,” the report highlighted.

“Investment growth hinges on the government’s ability to effectively and timely implement its ambitious public investment program. Moreover, the government needs to clarify the role of the private sector in its investment program.”

In addition to the said red flags, several domestic issues also pose a threat to the country’s economic progress. Inflation saw a record-high jump to 4.3 percent last month. Due to the increase in consumer product prices due to the tax reform, as well as a surge of value in the housing market, the inflation rate saw its highest rise since November 2011.

“There are several domestic risks facing the Philippines, including increasing inflation and an overheating of the economy as well as high fiscal deficits,” said the report.

Furthermore, international risks like “greater policy uncertainty related to growing trade protectionism and increasingly inward-looking sentiments in several advanced and emerging economies” are threatening to undo the good performance of the Philippine market for the past several years.

While signs of an overheating Philippine economy are now more apparent, not everything will set back the country’s powerful output.

Economic growth is predicted to remain the same at 6.7 percent for 2018 and 2019. Declining poverty rates are also seen by economists and unemployment has reached a new low. Still, challenges like unmoving mean wages and rampant underemployment are still persistent in the labor industry.

“The main challenge facing the Philippines today is not unemployment, but rather the poor quality of jobs in the labor market. High-quality jobs and faster growth of real wages are the missing links to higher shared prosperity in the Philippines,” said Mara K. Warwick, World Bank Country Director for Brunei, Malaysia, Philippines and Thailand.

At risk of overheating

The Tax Reform Acceleration and Inclusion (TRAIN) bill overhauled the country’s taxation system, with one of the most notable highlights being the reorganization of the income tax schedule.

As lower-earning individuals are now exempted from income tax, consumer wealth increases, followed by inflation. This results in economic overheating that can overturn the positive performance that the country has been enjoying for a while now.

According to Investopedia, an overheated economy means “a prolonged period of good economic growth and activity that has led to high levels of inflation.” With inefficient supply due to increased consumption, some industries won’t be able to keep up with the newfound high demand. The result will be a sharp increase in prices of goods and a slowdown in different industries.

Confused? Here’s a little story time to make things much clearer.

Let’s say the pillow-making industry is at an all-time high, with the economy booming and people enjoying a better standard of living. One pillow maker, Mr. Schmitz, decides it’s time to increase his production by borrowing money from the banks to fund his expansion.

With his company expanding, he employs more people and the standard of living of his worker’s increases. The better salary for everyone means the economy has to keep up by increasing the price of goods, including Mr. Schmitz’s products.

This sounds good, right? So where does it go wrong?

Unfortunately, the upward climb of prices prompts Mr. Schmitz to sell more. If he doesn’t sell that enough pillows to maintain profit, he has to downsize his company by firing people or lowering his production output.

His ability to pay back his business loan is also affected, which will make the banks more fearful in lending money. The company folds and Mr. Schmitz has to sell the company just to pay off his loan.

He is back to square one, along with the people who were once enjoying a better lifestyle because of better jobs and booming industry.

In itself, Mr. Schmitz’s tragedy will not even scratch the economy. However, replicate this trend across all industries and you’ll witness an overheating economy. What follows an overheat is a nosedive that leads to a higher inflation rate and even recession.

Last December, the Bangko Sentral ng Pilipinas (BSP) said that despite reports of potential overheating, the agency still believes that the economy is on the right track. However, Central Bank governor Nestor Espenilla said that the BSP is ready to move at any time because they “closely monitor growth and risks to overheating.”

Sources: The Philippine Daily Inquirer, The World Bank, The Philippine Star, Investopedia, Trading