PH Monday Macro: Slow and steady wins the race, especially for investors who monitor this economic indicator
This indicator of how much slack there is in the economy has been improving since its historic 2020 lows. Does this suggest the Philippine economy is well on its way to fully recovering?
Philippine Markets Newsletter:
The Monday Macro Report
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When we talk about the economy, we need to take a look at more than just one indicator to give us an idea about where we are and where we are headed.
Most who monitor the economy and markets use GDP growth, inflation rate, interest rate, and unemployment rate, among others. Those tell us about the state of the economy—albeit, after the fact—and not how to proceed going forward.
One economic indicator we look at constantly is capacity utilization.
Capacity utilization is essentially a measure of slack in the economy. It compares a country’s current production relative to how much it can potentially produce without causing inflationary pressures.
Companies operating at 85% capacity utilization are normally considered as operating at an optimal rate.
The Philippines’ capacity utilization rate averaged 81% from 2001-2019, inching towards 85% levels during the later years. Then due to the coronavirus lockdown and the drastic reduction in consumer demand, it massively dropped to 46% in April 2020.
Large dips in capacity utilization are a lagging indicator of a recession. They signal capex will likely be subdued going forward, and are also a signal of lower inflation going forward, due to slack in the economy.
True enough, the country went through a recession in 2020, when we also saw inflation rates remain low.
Though capacity utilization has been slow to improve, it’s remained mostly in step with the performance of the Philippine stock market. This is why we continue to think the local market is still worth investing in on a peso-cost averaging method.
Key indicators such as GDP growth and unemployment rate are showing positive signs of continued optimism for the economy.
Add to that the easing in the global cost of goods as the price of oil has come down from its peaks early in the year, and we have more reasons to believe Philippine corporates will step up once again in investing in their businesses.
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!
Philippine Markets Newsletter
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