Does GDP still matter?

Last week, the Philippine government announced that the third quarter gross domestic product (GDP) fell by 11.5 percent. Although the drop was slower than the 16.9-percent decline registered in the second quarter, it was much steeper than consensus expectations. Despite the bad news, the stock market rallied strongly together with other global markets as investors put a heavier weight on news that Pfizer’s covid-19 vaccine was more than 90 percent effective in protecting people from transmission of the virus.

Since the market is forward looking, it doesn’t matter that the third quarter GDP was bad. If a vaccine becomes available next year, then the covid-19 pandemic, which triggered the global economic crisis, will soon come to an end.

Nevertheless, some cautiousness is still warranted.

Although the future is more important than the past in determining the stock market’s direction, market expectations are equally important.

Market expectations are clearly positive right now. At 7,000, the Philippine Stock Exchange index is already pricing in a very strong economic recovery because it is trading at 18X 2021 P/E, which is above its 10-year historical average P/E of 16X.

However, the problem with positive expectations is that if fundamental indicators such as the 2021 GDP and corporate earnings growth disappoint, then the market becomes vulnerable to a correction.

At this point, there is still a significant risk that fundamentals could disappoint.

The Philippines’ fourth quarter GDP could remain very weak.

Aside from the high base last year, the agricultural sector, which was resilient in the third quarter, will most likely be badly hurt by the recent typhoons.

Consumers’ holiday spending is also expected to be weak given the high level of unemployment, the advanced payment of 13th month pay in the second quarter and restrictions on Christmas parties.

Although a vaccine might already be available next year, it might take a while to reach the Philippines given that all the companies developing vaccines were based outside the country. Moreover, once the vaccine reaches our shores, it remains uncertain if there are enough Filipinos who are willing and can afford to get vaccinated so that we can reach herd immunity.

Not everyone is willing to get vaccinated. Although there are no surveys available locally, according to a Gallup survey conducted in the United States last September, only 50 percent of Americans were willing to be vaccinated against the coronavirus.

The vaccine might also be too expensive and out of reach for many Filipinos. Unfortunately, the Philippine government is only allocating P2.5 billion in its 2021 budget for vaccines. According to the Department of Health, this is P10 billion short of what is needed to vaccinate an initial priority population of 20 million which includes health care workers and indigent Filipinos.

And while the pandemic remains, there is always the possibility of a third wave of infections, which is already happening in some parts of Europe and the United States. This could trigger another round of lockdowns, resulting in the much dreaded “W” shaped economic recovery.

Because of the said risks, we should continue to monitor fundamental indicators such as GDP growth aside from updates on the vaccine to determine whether market expectations are too positive or not, and if the market has the potential to continue going up or not.