The alphabet of recession: PH won’t see a ‘V’ or a ‘U,’ but an ‘L,’ says ING

After crash-lan­ding this 2020, it may take years for the Philippine economy to return to an above-6 percent annual growth trajectory as the coronavirus pandemic has knocked out main economic engines like a kryptonite hitting earth.

This is according to Nicholas Mapa, economist at ING Philippines, who sees the Philippines entering a “dirty L-shaped” reco­very—not the V-shaped recovery as projected by the most optimistic ones, not even the U-shaped recovery seen by many.

L-shaped recovery is characterized by a slow rate of recovery after an economic recession, with persistent unemployment and stagnant economic growth. This is the most pessimistic situation.

When plotted on a chart, a V-shaped recovery, on the other hand, shows a sharp decline and a sharp rise thereafter; while a U-shaped one means recovery will be slow but steady.

This year, ING expects Philippine gross domestic product (GDP) to contract by 3.95 percent. After a 0.2-percent year-on-year contraction in the first quarter, it sees a deeper decline of 6.3 percent year-on-year in the second quarter. Negative growth rates of 5.8 percent and 3.5 percent are likewise seen in the third and fourth quarters of 2020, respectively.

Like how a kryptonite emasculates the fictional Superman, Mapa noted COVID-19, the disease caused by the new coronavirus, was “sapping all of our strength and exposing a lot of our weaknesses.”

“After we see the bounce in economic growth from the contraction that we’ll see in the second, third and fourth quarters, we may no longer return to that 6-percent growth,” Mapa said. “So it’s not a straight-up L recovery where we plateau in the negatives. However, as we recover from COVID-19, it may take a while to return to our superhero form in prepandemic times.”

For 2021, ING expects growth to average just 4.875 percent; while for 2022, average growth is seen at 4.7 percent.

Mapa said the whole foundation of the Philippines growth story had already crumbled. Weak remittances and unemployment rate reaching a high of 17.7 percent would also leave a “gaping hole” in the economy, he said.

Mapa said growth prospects would largely depend on the government’s fiscal response, noting that monetary authorities have already done the “heavy lifting” with aggressive monetary easing.

As far as fiscal stimulus is concerned, the larger it is, the better it will be to cover economic losses, according to Mapa. The market could tolerate a national government deficit-to-GDP ratio of 8-9 percent as the pandemic called for an “extraordinary” response, he said.

“If you don’t tend the illness right away, it tends to fester. The hole tends to get bigger,” he said. The aggressive lending stimulus measures taken by the Bangko Sentral ng Pilipinas should be complemented by greater spen­ding measures, he said.

He also noted the benign inflation rate was but another sign of the depressed domestic economy.

The appreciation of the peso against the US dollar is likewise seen as a symptom of falling potential output as imports implode.

The last time the Philippines saw an economic recession was in 1998, when the Asian financial crisis resulted in a 0.6-percent GDP contraction. The country saw massive local currency devaluations against the US dollar, the collapse of property markets and a wave of corporate bankruptcies that bludgeoned ban­king systems.