34th Anniv Suppl

The probable shape of the recovery curve

"It will depend on three factors."


If the recovery of an economy from a recession is defined as the gradual diminution of its GDP (Gross Domestic Product) contraction, the recovery of this Philippine economy has begun. The contraction of the Philippine GDP was substantially smaller in 2020’s third quarter than in the preceding quarter—1.5 percent and 16.9 percent, respectively—and when the final PSA (Philippine Statistics Authority) numbers are in, the data will very likely show a still-lower contraction in last year’s final quarter.

Economic recoveries, like other movements of an economy, are depicted visually by curves. The current recovery is no exception. Economists already are plotting on charts their visions of the probable shape of the recovery curve. A recovery connotes upward movement; accordingly, a recovery curve is shaped like a U or a V. Should a recovery falter and subsequently resume, the curve can be shaped like a W.

A recent newspaper story had the economic analyst of a commercial bank talking about a “Dirty L” curve. That’s a new one. Unfortunately, the story carried no explanation of how a “dirty L” recovery curve is arrived at. The only possible explanation is that the economic contraction came to an end and GDP began to move in sideways, crab-like fashion. That is an unlikely situational once recovery gets under way, a recovery curve is bound to point upward, however slightly.

Which will it be for the Philippine economy’s developing recovery - a V-curve or a U-curve? The answer will depend on a combination of three factors. These are (1) the depth of the economic contraction; (2) the magnitude of the government effort - particularly on the fiscal front - to deal with the economic contraction; and (3) the national psychological environment, particularly the sentiment of consumers, who account for close two-thirds of GDP. The interplay of these factors will determine whether the recovery will proceed in straight-upward V fashion or will be decidedly slow and tentative.

A V-type recovery curve can be ruled out. The 16.9 percent and 11.5 percent quarterly GDP contractions indicate that the Philippine economy has been severely hit by the pandemic; it is not easy to recover from severe hits. The government’s fiscal response to the economy’s slowdown - represented mainly by the two Bayanihan to Heal As One laws - is widely believed to have been inadequate, given the magnitude of the supportive job that needed to be done. Not the least important of the three factors is the persistent sentiment of fear and insecurity among this country’s consumers and investors, a sentiment reinforced recently by survey results indicating many Filipinos’ apprehension about being vaccinated against COVID-19.

The curve depicting the developing recovery is almost certain to be U-shaped. The U could be oblong-like or it could be shallow. Whether the curve will be shaped like a shallow U will depend on whether the economy can expect any more substantial fiscal stimulus from the government and whether the overhang of national fear and apprehension will dissipate fairly quickly. How efficiently the government, with the cooperation of the business community, can roll out the vaccination program will largely decide the latter issue.

Topics: Rudy Romero , Philippine economy , GDP , Gross Domestic Product , PSA , Philippine Statistics Authority
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