RP economy to avoid 'thrift paradox,' BSP says

MANILA, Philippines - The Philippine economy will avoid the “savings paradox," monetary officials said, saying that Filipinos’ inclination to spend on consumer goods will boost domestic demand, thereby averting a slowdown. Also known as the “paradox of thrift," the “savings paradox" as conceptualized by British economist John Maynard Keynes indicates that saving money during a recession will further reduce economic growth. Increased savings, especially during a slowdown, will reduce demand for goods, eventually resulting in lower total savings in the population. This partly explains why the economy only grew by just 0.4 percent from January to March this year despite fiscal and monetary efforts to increase and accelerate spending and make more credit available to consumers and companies. But a spending slowdown is far from the scenario expected by the Bangko Sentral ng Pilipinas (BSP) which expects the economy to grow by 1.8 percent this year. “I don’t believe we are yet in the trap of what has been called the paradox of savings. I am still optimistic that domestic consumption will remain resilient given the basic nature of Filipinos," BSP Governor Amando M. Tetangco Jr. said in a text message on Sunday. The detrimental effect of saving — as shown by the economy’s poor growth in the first three months — is likely to ease in the second quarter. “First, as seasonal factors such as enrollment-related expenses are made and, second, as the uncertainty in the markets abate with some improvement in the global real economy," he said. The economy will also begin to benefit from the government’s P330 billion Economic Recovery Program, Tetangco added. The monetary body has reduced interest rates for the fifth straight time since December to ensure that businesses have increased access for cheaper loans, useful for expansion that will eventually generate more jobs. Meanwhile, during its most recent briefing in Washington, DC, the International Monetary Fund (IMF) said that households of its member-nations — including the Philippines — showed significant increases in savings rates, thereby cutting domestic demand. This has prompted IMF Economic Counselor and Director of Research Olivier Blanchard to call on governments to spend more for economic stimulation. For her part, economist Solita C. Monsod said that the Philippines’ first quarter expansion startled most experts. Weaker trade or falling remittances failed to fully account for the dismal outcome, said Monsod, a former socioeconomic planning secretary, and a current blogger for GMANews.TV. Monsod shared Tetangco’s sentiments, asserting that further precautionary saving will worsen the country’s current economic conditions. Both encouraged households, corporations, and government to spend more to help the economy along. “An increase in precautionary savings in the first quarter is understandable given the heightened uncertainty during the final quarter of 2008 in the global financial markets that has since moved into the real sector as evidenced by the recessionary trends becoming pervasive in the major economies and some emerging market economies," Tetangco said. - GMANews.TV