AS the Third Quarter ends and the more relaxed general community quarantine continues for another month, people are wondering if the economy is now recovering and are we regaining back confidence. As my colleague, Dr. Aldaba, wrote last week, the critical signs that need to bring back confidence hinge on addressing the health aspects immediately. Beyond that, we are also monitoring leading economic indicators that signal its trajectory whether continuing downtrend or reversals. We consider the following latest data releases from the Philippine Statistics Authority and the Bangko Sentral ng Pilipinas (BSP)—employment, manufacturing output, overseas Filipino workers (OFW) remittances, and real estate price index. These four indicators are showing reversals from the economic downtrend but we need to validate if these are blips or they are indeed turns from the corner.
The unemployment rate fell from about 17 percent in April to 10 percent in July. That lowered the number of people without jobs to about 4.5 million—still a substantial number but definitely an improvement. However, if you look into the details of job creation, it was mostly an improvement in self-employment rather than actual jobs created. The number of new jobs created was mostly in trade, which generally remained muted. The share of self-employed has reached almost 30 percent of total employed and those wage employed even went down from 51 percent in January 2020 to 47 percent in July. It is possible that increases were due to people going online selling. Hence, while unemployment indeed went down, new job creations were not wage employment but rather self-employment. This is neutral for the economy, but we need to see wage employment increase as this signals that firms are hiring again.
Manufacturing production as reported in July 2020 has reflected a significant improvement in the past months. The decline in production output had steadily decreased from a peak of -41 percent in April to -15 percent in July. This shows that the gradual reopening of the economy allowed for firms to restart operations and production albeit at still slower pace, as several industries remained restrained from opening. Machineries also reported the highest capacity utilization, while beverages reported the lowest at below 50 percent. Overall capacity utilization is still 10 percent lower than pre-Covid levels of 85 percent. These data show that the manufacturing sector has probably turned the corner. Machineries are largely related also to the improvement of trade as being pulled up by the global value chain due to China’s recovery. Nonetheless, as manufacturing’s contribution to the economy is not as large as services, the impact will be limited mostly to those in exports and its job generation will be limited to the highly skilled, which is unlikely to hire the most affected sectors of accommodations, transportation and retail services.
Data from the BSP also showed that remittances pulled up again in July, the second consecutive month of increases this Covid period. This was after posting double digit declines in April and May of close to 20 percent. The recovery of remittances is critical for the economy as it is roughly about 10 percent of total GDP and contributes approximately 20 percent to total consumption. With domestic consumption severely pulled down by the lockdowns, remittances are much more needed support. However, we initially estimated that remittances this year will also be severely affected by the pandemic as the global lockdowns have pushed unemployment in many countries including those where OFWs are concentrated. As of this writing, the Department of Foreign Affairs has already accounted for about 200,000 OFWs being repatriated. Our estimate is that about 400,000 could have lost their jobs and that remittances could fall from $3 billion to $6 billion this year. If people have lost their jobs abroad, why is it that remittances are increasing? It is likely because OFWs who still have jobs were unable to send money during the lockdowns and thus were able to send money again recently. Also, it is possible that those who have been sent home or repatriated also remitted their savings or money they have accumulated during their employment and/or benefits. Finally, it is also possible that those who kept their jobs continue to regularly send home remittances and are adjusting due to the appreciation of the peso. The average remittance from this point of view could have increased by around 5 percent to 10 percent. Hence, we still need to see the August and September data to validate if this is a turn or a blip.
Finally, the BSP reported that real estate price index hit a record high in the second quarter, reflecting a growth of 27 percent year-on-year. This increase seems inconsistent with the number of loans granted to the real estate sector during the same period. Nonetheless, the high liquidity of the market with very limited investment opportunities could have pushed those with excess cash to purchase new housing units, notably condominium units. It is also possible that purchases that were made prior to the pandemic were recorded only during this period. With the weakening of demand for retail and the outward movement of POGOs, it is likely that this is also a blip than a turn.
All told, these leading indicators will need further validations if the economy is indeed turning back up to growing or we are just experiencing blips. What is essential at the moment is for a whole of country approach, i.e., government, firms and consumers, to continue to adapt and dance with the virus and allow more sectors to open en route to a sustainable recovery.