Philippine Markets Newsletter

MONDAY MACRO: A lot of indicators continue to signal worry, but this chart shows how economic recovery will still persist

September 13, 2021

A lot of indicators continue to flash troubling signals. Current GDP growth seems unsustainable, inflation remains high, and the unemployment rate is still at elevated levels.

We take a look at this chart to see if these indicators are pointing to economic decline or persist in its recovery.

Philippine Markets Newsletter:
The Monday Macro Report
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We’ve talked a lot about the yield curve in past Monday Macro articles and how important it is when evaluating the economy on a macro level.

Treasury bond yields are considered a measure of market risk since they represent the rate investors are willing to lend to the government, the safest borrower in a country.

Normally, yields are higher for bonds with longer maturities because the uncertainty is greater, even from government-backed instruments.

However, there are times when we see a “yield curve inversion” or when the yields of short-term bonds rise to a higher level than long-term bonds. This implies that bond investors are seeing the near-term environment as riskier than the long-term, despite the long-term’s greater uncertainty.

One reason for this is that bond investors may be expecting the economy to worsen within the next one or two years. In fact, many have come to adopt the view that recessions often follow yield curve inversions.

That said, last January, we talked about how the yield curve has improved and an inversion is unlikely to occur due to improving investor sentiments along with the ability of top firms to maintain healthy credit fundamentals.

However, with many major macro indicators still at unhealthy levels, it’s easy to be concerned about the economy taking a turn for the worse. Although the Philippine economy is technically no longer in a recession, the country has yet to make a full recovery.

Year-over-year GDP growth was 11.8% in Q2 2021, but Q2 2020 was an easy comparison. In addition, the country’s constant back-and-forths with easing and more stringent quarantine measures likely makes its current GDP growth unsustainable.

Furthermore, headline inflation rate has remained at elevated levels, recording 4.9% in August 2021. It’s higher than the 2%-4% inflation guidance of the Bangko Sentral ng Pilipinas (BSP).

Meanwhile, the emergence of new COVID-19 variants and the rapid spike in cases in the country continue to limit job creation as the unemployment rate remains at 7.7% amid quarantine restrictions.

A lot of indicators are currently flashing troubling signals, which may cause some to worry that the Philippines will return to a recession or at the very least see GDP declines once again.

This is why it’s a good time to look at how the yield curve is faring, whether it is reflecting similar sentiments as well.

Based on the chart below, the yield curve has actually widened recently. From 1.1% in January 2021, the spread between 10-year and 2-year bond yields has now doubled at 2.2% in August 2021.

As a result, we can say bond investors are thinking the opposite. Despite the worrying macro signals, it seems the economy is forecasted to continue recovering and that a recession within the next couple of years is unlikely to occur.

The yield curve chart continues to echo the sentiment of our Credit Cash Flow Prime. A recession in the near-term is highly unlikely, due to the healthy credit of Philippine corporations.

About the Philippine Markets Newsletter
“The Monday Macro Report”

When just about anyone can post just about anything online, it gets increasingly difficult for an individual investor to sift through the plethora of information available.

Investors need a tool that will help them cut through any biased or misleading information and dive straight into reliable and useful data.

Every Monday, we publish an interesting chart on the Philippine economy and stock market. We highlight data that investors would normally look at, but through the lens of Uniform Accounting, a powerful tool that gets investors closer to understanding the economic reality of firms.

Understanding what kind of market we are in, what leading indicators we should be looking at, and what market expectations are, will make investing a less monumental task than finding a needle in a haystack.

Hope you’ve found this week’s macro chart interesting and insightful.

Stay tuned for next week’s Monday Macro report!


Angelica Lim
Research Director
Philippine Markets Newsletter
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