Philippine Markets Newsletter

MONDAY MACRO: Though the current mix of high inflation and low economic growth has investors concerned, the reason for it is not as bad as it seems

March 8, 2021

Last week, we talked about how inflation could potentially impede near-term growth. Although it has worsened, economists believe that this should be less of a concern for now.

This chart shows how inflation can affect corporate earnings growth in the longer term.

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High inflation rates mean prices of goods and services are increasing, which translates to the declining value of money. Simply stated, you’ll need more money now just to buy the same things you used to when the inflation rate was lower.

To keep inflation rates from rising further, the central bank will need to intervene. One way to do this is by increasing interest rates, which promotes saving and reduces consumption. In effect, inflation rates decline over time as the economy cools down.

On the other hand, for recessionary environments or periods with low economic activity and high unemployment rates, the central bank needs to reduce interest rates to promote spending and lending. Low interest rates mean savings are no longer attractive, and so consumers will opt to spend instead. Businesses will also be able to borrow at lower rates. Together, these two effects will cause economic activity to rise.

What if we were in a situation where prices of goods and services are rising amid a slowdown in economic activity? A high-inflation, recessionary environment.

As concerning as the Philippines’ current economy may seem to most, at the beginning of February, the Bangko Sentral ng Pilipinas (BSP) Governor downplayed this concern and assured that inflation will be well-anchored to its average inflation forecast of 4% this year.

However, last week, inflation exceeded forecasts and reached 4.7% in February primarily due to rising pork prices. With the shortage of pork supply, the inflation rate was higher than expected in a recessionary environment.

Does this mean the Philippines is in a state of stagflation?

The word stagflation originates from the combination of stagnant growth and high inflation rates. One of the most notable examples of stagflation was in the 1970s in the US. In the early ‘70s, a state of recession occurred with high unemployment rates and rising inflation rates due to oil supply disruptions.

Throughout the second half of the ‘70s, unemployment rates and inflation rates continued to expand. Unemployment rates rose from 5.4% in the first half to 7.9%, and the Consumer Price Index (CPI) rose from 6.6% to 7.9%.

Just as oil supply disruption was the main reason for the US’s stagflation in the ‘70s, the current pork supply disruption in the Philippines because of the African swine flu (ASF) is what’s causing the inflation rate to rise even with a slow economy.

Fortunately, inflation from supply disruptions is usually easier to address than inflation caused by rising demand. As long as aggregate demand does not outpace aggregate supply, monetary policy does not remain loose for an extended period, and the government is able to address the supply shortages, high inflation will be manageable. Though we will continue to see higher prices of goods, we will not see the economy reach stagflation just yet.

Meanwhile, high inflation will continue to pose risks to business profitability as costs of goods and production remain high. If businesses are unable to pass these excess costs to their customers in time, their profits will decrease. This is also why high inflation is detrimental for the Philippine Stock Exchange Index (PSEi) and the stock market in general.


The chart above shows that the headline inflation rate (red line) is negatively correlated with aggregate Uniform profitability (blue bars) of nearly all companies listed on the Philippine Stock Exchange. With inflation rates higher than 4.7% in the years 2000, 2001, 2005, and 2008, the average Uniform ROA is 4%. Meanwhile, an average Uniform ROA of 6% is observed in periods of low to moderate inflation rates.

Despite similar inflation rates from 2019 to 2020, low domestic demand due to the recession has caused lower expected Uniform profitability in 2020. Under this higher inflationary environment, the recovery in corporate profitability, as well as the Philippine economy, is expected to be challenged in the near term while the government sorts out the pork supply shortage.

About the Philippine Market Daily
“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 Daily
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