PH entering the ‘Goldilocks Economy’ phase — Diokno

The Philippine economy is entering an ideal phase with “just the right mix” of rapid economic growth and low levels of inflation. In layman’s terms, the country will be able to support its quick economic expansion for the coming years. This claim was made by Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno in his speech during the Wallace Business Forum (WBF), which was held earlier this June 2019 (SEE: Philippines enters ‘Goldilocks’ economy phase — Diokno, The Philippine Star).

Governor Ben Diokno’s speech should be music to the ears of both existing and potential real estate investors. On one hand, rapid economic growth will lead to higher levels of disposable income — which often has a positive effect on property values and rental prices. On the other hand, low levels of inflation ensures that the Bangko Sentral will continue its expansionary macroeconomic policy (SEE: BSP cuts key rates; More to come in the near future, PropertyAccess Philippines) — leading to higher liquidity in the market. The combination of the expected higher asset values, rental prices, and market liquidity in the coming years makes today an attractive time to invest in real estate.

What is a ‘Goldilocks Economy’ Phase?
The term ‘Goldilocks’ is a term often used to describe an ideal situation wherein there is an optimal mix between two or more opposing variables. The BSP Governor used this phrase to describe the Philippine economy having just the right mix of economic growth and inflation, which often move in opposite directions.

On one side of the extreme, there is the scenario where the economy is expanding rapidly while the inflation rate is also rising. This phenomenon occurs when the country’s productive capacity cannot support the increased level of economic activity. In other words, the growth is not sustainable. As a result, the economy overheats, which leads to high levels of inflation. Just like the father bear’s soup in the story of Goldilocks, the economy — in this case — is too hot.

On the other hand, there is also the case wherein both economic growth and inflation are slow. This phenomenon occurs when the level of economic activity stagnates. In other words, there is little to no growth. As a result, the economy cools down. Just like the baby bear’s soup in the story of Goldilocks, the economy — in this case — is too cold.

Right in the middle of these two extremes lie the ‘Goldilocks point’ wherein there is high economic growth, which is accompanied by manageable levels of inflation. This scenario occurs when the country’s productive capacity grows along with the economic activity. In other words, this type of economic growth is sustainable in the long run. As a result, the economy neither overheats nor cools down. Finally — just like the mother bear’s soup in the story of Goldilocks, the economy is just right. Diokno claims that the Philippine economy is currently at this phase due to the country’s rapid growth and manageable inflation levels.

Rapid Economic Growth
In the past decade, the Philippines has been the fastest growing economy in the ASEAN region and the second fastest in the world. Its gross domestic product (GDP) has consistently grown at a rate of 6% over the same time span. This expansion has largely been attributed to continued strong OFW remittances, growing Business Process Outsourcing (IT BPO) sector, and an influx of foreign direct investments.

The economy has slowed down a bit in the first quarter of 2019, posting a lackluster GDP growth of around 5% (SEE: Philippine GDP growth drops to 4 year low in Q1 of 2019, Rappler). This slowdown, however, is attributed to the delayed approval of the 2019 government budget — thereby delaying government expenditure. Moving forward, growth is expected to pick up to its pre-2019 levels. In fact, experts estimate Philippine GDP to double to $670 million (₱35 trillion) by 2026 (SEE: GDP seen doubling by 2026 as Philippines “set for dynamic growth”, The Philippine Star) and even reach the $1 tillion (₱52 trillion) threshold by 2032 (SEE: IHS Markit: Philippines to be a trillion dollar economy by 2032, The Philippine Daily Inquirer). These jumps represent at least a 7% compounded annual growth rate (CAGR) for the next decade.

Manageable Inflation Levels
The other side of the story is inflation, which reached historic levels back in 2018, when it reached 6% to 7%. For comparison, the normal and healthy  inflation rate level is at around 2% to 4%. Some parties attribute this rapid inflation to the Tax Reform for Acceleration and Inclusion (TRAIN) Law which levied excise taxes on petroleum products and reduced personal income taxes. They claimed that the increased disposable income caused by the tax cuts caused the economy to overheat. Proponents of the TRAIN Law, however, pointed at other factors such as rising global oil prices and the rice shortage in 2018.

The inflation rate, however, has settled to a more manageable level at around 3% in 2019. Moving forward, inflation rate is expected to stay within the 2% to 4% threshold set by the Bangko Sentral.

Effects on the PH Real Estate Market
All of these positive developments in the economy should excite real estate investors for two main reasons: (1) Higher asset and rental prices and (2) Higher market liquidity.

First, the growth in the economy will surely lead to higher levels of disposable income. Economic theory then suggests that the increase in income would translate into higher demand for goods, property, and services across the economy in general. Eventually, this growth should translate into higher asset value and rental prices.

Second, the stable level of inflation would help ensure that the Bangko Sentral ng Pilipinas, led by Governor Ben Diokno, will continue its expansionary monetary policy in the future. In fact, the BSP has already cut its policy rates earlier this year and is expected to do so again before the year ends. These moves are expected to increase liquidity in the market and will reduce interest rates.