On July 16, we wrote about what many believed to be the three initial signs of business revival after several months of the pandemic. They were the slower decline in external trade, the softer drop in manufacturing output and expansion in capacity utilization, all in May. We called these green shoots, but not quite at the time.

Updates on these backward-looking indicators would point to some promising improvements eight months into the pandemic. But it remains a mixed bag.

Based on their performance in the third quarter against the second quarter this year, there was strong recovery in both total trade and production volume. Year on year, however, both of them continued to decline although at a slower pace.

Capacity utilization was compressed from 84.3% in the first three quarters of 2019 to 75% in the same period this year.

Looking ahead, it’s likely to see some modest recovery in the last quarter of 2020 and next year but for one important issue. The so-called economic scars. Last week, we wrote that the IMF had already documented that the lockdown in the Philippines produced weak results so an early opening was ill-advised. Infections remained widespread. Re-opening took time and as a result, we suffered one of the deepest recessions in the world. The narrative was very simple for the Philippines. While we faced the pandemic with good macroeconomic buffers, our public health system was our Achilles’ heel. Testing, tracing, quarantining and treating took off like a diesel engine of the old variety.

In the recent panel discussion during the opening session of the 58^th Annual Meeting and Conference of the Philippine Economic Society, we suggested that these findings for the Philippines establish the sad outcome of the so-called “voluntary social distancing.” Business and entertainment activities remain weak because people continue to be afraid of the virus and what it can inflict on them.

In getting the virus, people anticipate prolonged quarantine and therefore economic lockdown. Chat groups in Viber and Messenger abound with stories of sudden death and millions of pesos in expenses with very little help from the public treasury. One single misstep could be the tipping point to the beyond. A fairly intelligent person would therefore avoid doing what he would normally do including shopping at the malls, eating out, and doing some travels.

Recent mobility data continue to support this change in human behavior.

Google mobility indicators, for instance, appear to be showing some signs of life. Turnaround point was between May and June. However, looking at more granular data, we see that mobility in public transport hubs and workplaces has remained flat. In places of residence, Google indicators show even downward mobility.

Other mobility trend indicators are also showing the same narrative. Apple mobility trends whether for driving, transit or walking are consistent with mileage-based Waze indicators: some slight increase but nowhere close to pre-COVID-19 levels.

These mobility markers would have been excellent leading indicators of the third quarter results of the national income accounts. The lower propensity of people to move around translated into a huge decline in private consumption, gross investment and even net trade. Real GDP further dropped by 11.5% from the second quarter’s decline of 16.9%. For the first nine months of 2020, real gross domestic product (GDP) contracted by 10% compared to year-ago growth of 5.8%. The early business revival projected in the third quarter did not materialize.

Adjusted for inflation, national output shrank from P14.1 trillion to P12.7 trillion. With the population steadily growing by 1.4%, each Filipino received his share of the total output that is smaller by 11%. What is worse is that unemployment doubled from 5.4% in July 2019 to 10% in July 2020. This means for every 100 people in the labor force, 10 are out of work. This is not surprising because average capacity utilization shrank.

Since these three high frequency mobility indicators already cover part of November 2020, and the picture remains one of limited mobility, we are not therefore too sanguine about the prospects for the last three months of 2020.

While backward-looking, financial data from the Bangko Sentral ng Pilipinas (BSP) provide us with additional forward-looking insights. During this pandemic, people would rather keep their money in the banks rather than engage in bonds, stocks or business. But banks have chosen to be procyclical: they tightened rather than eased their lending standards in this downcycle and lending rates remained elevated despite the accommodative monetary policy stance of the authorities.

As of September, loans outstanding, net of placements in BSP’s overnight instruments, grew by a measly 2.8% versus last year’s 10.5%. Yet, deposit liabilities continued to grow double digit at 10.6%, almost double last year’s 5.4%. With banks absorbing more deposits, they maintained their viability only by turning around and lending at a high interest rate and depositing their excess funds with the BSP or buying government securities, which they all did. Deposit rates, whether savings or time, were half of their levels last year. In effect, savers are penalized and if this is to carry over to future periods, both capital formation and growth may be undermined.

Policy-wise, further monetary accommodation will be good only for signaling purposes but its efficacy is questionable because credit remains weak. The extra liquidity released to the system simply flows back to and at the expense of the BSP itself. The transmission of monetary policy is hamstrung by the pandemic’s debilitating effect on human behavior.

Thus, we cannot agree more with Finance Secretary Sonny Dominguez’ statement yesterday that “the government needs to address the stagnant consumer confidence that places a drag on the pace of the nation’s recovery.” He was correct in clarifying that confidence remains a function of our public health capacity. But recent findings in the Philippine Senate are not exactly encouraging. As the press reported “despite having nearly double the minimum required number of contact tracers for COVID-19 cases, the Philippines’ contact tracing campaign remains weak and inefficient.” This is hardly the way to inspire consumer and business confidence.

It will be enormously confidence-boosting if we see both a repurposing of many lump sum items in the 2021 budget to health and education and targeted infrastructure as well as firm fiscal support. While government final consumption was just over 10% of private consumption in 2019, this actually doubled in the first three quarters of 2020. Public construction also contributed significantly to gross capital formation and growth with more than one-on-one multiplier effects. Having strong fiscal response can help pandemic mitigation buoy up public confidence.

The only drawback is absorptive capacity. The pandemic scare, exacerbated by Ulysses, would not allow public works to continue in affected areas, floods restrict movement of people and materials. Crowded spaces are not allowed by health protocols. We cannot just simply spend our way to quick economic recovery as some would suggest.

We are not quite certain about the present trajectories of both the business cycle and the financial cycle. But the challenge for the whole of society is to sustain the improvement in pandemic mitigation with steady monetary and ample fiscal support to avoid a convergence of these two cycles in the downturn. We would not want to discount what the glitter of Christmas lights and decor could do to heal consumer spending and empower business spirit.

Diwa C. Guinigundo is the former Deputy Governor for the Monetary and Economics Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. In 2001-2003, he was Alternate Executive Director at the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.