What happens in an economic crisis? PH risks losing gains due to COVID-19 pandemic

Jessica Fenol, ABS-CBN News

Posted at Apr 08 2021 04:56 PM

A local resident of a depressed community in Bgy. Paligsahan, Quezon City is receives relief goods being distributed by the barangay officers on March 19, 2020. File

MANILA - A deep economic crisis can have a longer effect on an economy and could reverse gains in the past years, an economist said Thursday citing data from crisis that occurred in the past 2 decades.

Past crisis showed that it takes some 3 to 5 years before an economy reverts back to pre-crisis level, visiting professor of UP School of Economics Dr. Annette Pelkmans-Balaoing said in a virtual briefing. 

"What you also see from the past crisis they really have a longer term effect. The deeper the recession, the more longer term effect that it will have on the economy," she said.

In a crisis, such as the COVID-19 pandemic, "you don’t only just go down, but you cannot make up for lost ground. You really deviate from your potential trend," Balaoing said. 

The Philippines has suffered from an economic downturn, with the economy contracting at its worst quarterly level of 17 percent in Q2 2020 and registering a -9.6 percent for the entire year. 

COVID-19 also put employment at risk. During the pandemic, construction and manufacturing were among the most affected, she added.

When employment is at risk, consumer confidence also drops, Balaoing said.

Based from estimates at least 15 million workers were affected in the Philippines until the third quarter of 2020 in varying degrees including unemployment and reduced work hours, among others, Balaoing said.

However, "financing gaps" occur when there is demand for loans but banks have higher risk aversion due to uncertainties.

In the Philippines, the Bangko Sentral ng Pilipinas has been urging banks to lend more. Key interest rate was kept at its lowest level of 2 percent.

In some cases, an economic crisis even results in political unrest, Balaoing said.

"It's a toxic combination when you have an economic crisis and political unrest like in Myanmar. People with no jobs basically have nothing to lose. People with no prospects at all, it's a very conducive environment for political unrest," she said.

The pandemic also threatens to reverse some gains in poverty reduction.

Before the COVID-19 pandemic, the Philippines was also on track to become an upper middle class economy by 2022, but now it needs more growth to achieve that, she said.

The pandemic is also likely to have a scarring effect and long term impact on the economy including the loss of entrepreneurial capital for middle size firms that can lead to a market that is concentrated on large firms, she said. 

Young workers won't be entering the labor market at their skill level and there is the risk of foregone investments in innovation, she added.

"Ideally, the way to go is to address the pandemic well. We’re talking about trying to avoid an economic crisis, the best way is to really suppress the virus," Balaoing said.

The Philippines has imposed one of the world's toughest and longest lockdowns in 2020. Another round of enhanced community quarantine was imposed in the NCR Plus in 2021 due to rising confirmed COVID-19 cases. 

Gross domestic product contracted by 9.6 percent in 2020, its worst since the end of World War 2, data showed.

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