GDP growth may fall below target in 2024, 2025

The economic growth may fall below the government’s target this year and in 2025, as high interest rates dampen domestic demand, the Bangko Sentral ng Pilipinas (BSP) said.

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“The outlook on domestic economic activity remains intact, even as the economy is projected to operate slightly below potential. Economic growth could settle below the DBCC’s (Development Budget Coordination Committee) target of 6-7% for 2024 and 6.5-7.5% for 2025,” the BSP said in its latest Monetary Policy Report.

The BSP did not provide a specific gross domestic product (GDP) growth estimate.

Latest data from the local statistics authority showed that GDP expanded by 5.7% in the first quarter, faster than 5.5% in the previous quarter but slower than 6.4% a year ago.

“The projected impact of the BSP’s policy rate adjustments is likely to peak in the second half of 2024,” the central bank said.

At its May meeting, the Monetary Board kept its benchmark rate steady at 6.5%, the highest in 17 years, for a fifth straight meeting.

The Monetary Board has raised borrowing costs by a cumulative 450 basis points (bps) from May 2022 to October 2023 in order to tame inflation.

“Higher global crude oil prices and positive real interest rates could also temper domestic demand,” the BSP said. “However, stronger net exports amid an improving global growth outlook could support GDP growth.”

Citing estimates from the Policy Analysis Model for the Philippines, the BSP said the “output gap may turn slightly negative in 2024 but will likely close in the latter part of 2025.”

“Domestic economic activity could ease as the effects of previous policy interest rate adjustments and declining real incomes, along with the possibility of tepid global growth, temper aggregate demand,” the central bank said.

“On balance, the latest assessment of the output gap indicates potential deflationary pressures going forward.”

At the same time, steady investment growth, improving jobs market and infrastructure spending may “continue to drive productivity and potential output,” the BSP added.

The BSP said that Philippine GDP is expected to pick up in 2025 “on stronger net exports and an improving global growth outlook.”

“The resilience of the global economy, despite central bank interest rate increases, has reflected the ability of households in major advanced economies to draw on substantial savings accumulated during the pandemic,” it said.

However, the BSP noted the pace of global growth is “still low by historical standards,” mainly due to high borrowing costs, long-term effects of the pandemic and Russia’s invasion of Ukraine, weak productivity growth and rising geoeconomic fragmentation.

The International Monetary Fund sees the global economy growing by 3.2% this year and next year.

Source: Business World

PHL on track to reach upper middle-income status

The Philippines is still on track to become an upper middle-income economy next year as long as the growth momentum continues, National Economic and Development Authority (NEDA) Secretary Arsenio M. Balisacan said.

“If growth this year is not dampened, [we] should be on track,” he told reporters on the sidelines of the BusinessWorld Economic Forum on Wednesday.

The administration of President Ferdinand R. Marcos, Jr. has set a target for the Philippines to reach upper middle-income status by 2025. An upper middle-income country means having a gross national income (GNI) per capita income range of $4,466 to $13,845.

The World Bank currently classifies the Philippines as a lower middle-income country with a GNI per capita of $3,950.

Mr. Balisacan said gross domestic product (GDP) growth must average 6.1% in the next three quarters to hit the government’s 6-7% growth target.

The Philippine economy expanded by 5.7% in the first quarter, slightly faster than 5.5% in the previous quarter.

“There are still three quarters out there. The good thing is inflation is manageable now. Even though we expected worse for the April [print,] it turned out better than expected. So, we hope that will continue,” Mr. Balisacan said. 

Inflation accelerated for a third straight month to 3.8% in April from 3.7% in March. Inflation averaged 3.4% in the January-April period, below the central bank’s 3.8% full-year forecast.

In the coming months, NEDA expects economic growth to be favorable as the Bangko Sentral ng Pilipinas (BSP) was “less hawkish” in its last policy meeting and has signaled a possible rate cut in August.

“If the BSP is not going to raise any further the interest rate, and in fact, the governor has indicated that they might start loosening, so that will improve expectations, and expectation drives consumption,” Mr. Balisacan told reporters.   

Last week, the Monetary Board kept its target reverse repurchase rate unchanged at a 17-year high of 6.5%.

The waning El Niño dry pattern and expected easing of rice prices may also improve the country’s GDP growth prospects, according to the NEDA chief.

“Since El Niño is tapering, we expect that world prices for commodities, including rice, are expected to moderate and start falling, especially for rice,” Mr. Balisacan said.

Rice inflation, which contributes nearly half to the overall inflation print, accelerated by 23.9% in April. However, this was slower than 24.4% in the previous month.

Security Bank Corp. Chief Economist Robert Dan J. Roces said that achieving upper middle-income status “is not just about hitting a specific threshold, but about building an equitable economy.”

“While the Philippines has made significant progress in recent years, driven by factors such as a young population, a thriving services sector, and increasing foreign investments, it is also crucial that the benefits of economic growth are more evenly distributed,” Mr. Roces said.

To increase its GNI per capita, the country must also ensure competitiveness across all sectors, address infrastructure gaps and challenges, and improve governance in all institutions, Mr. Roces said.

Since 1987, the Philippines has been classified as a lower middle-income economy, according to the World Bank’s earliest records.

“While the Philippines has strong growth prospects that suggest it could reach upper middle-income status in a few years, several challenges — like a potential global economic slowdown, infrastructure and education deficits, and the impact of natural disasters — could impede this goal,” Jonathan L. Ravelas, senior adviser at professional service firm Reyes Tacandong & Co., said.

The World Bank forecasts that the Philippines would be the fastest-growing economy in Southeast Asia this year with a 5.8% growth estimate.

For 2025, the multilateral lender hiked its growth forecast for the Philippines to 5.9% from 5.8%.

However, the World Bank’s growth forecasts for the Philippines still fall behind the government’s 6-7% target band.

Mr. Balisacan cited the need to “diversify” the country’s growth sources to ensure inclusive and sustainable economic expansion.

“So, what are the growth drivers? We are pushing on all fronts. Opportunities across the entire economy abound in enabling public infrastructure such as energy, water, and physical and digital connectivity, as well as social infrastructure such as schools, healthcare facilities, and housing,” he said.

The government is also looking to expand growth outside the National Capital Region (NCR), he added.

Source: Business World

PHL should expand by more than 6% in next three quarters

The Philippine economy should expand by more than 6% in the next three quarters to meet the government’s growth target this year, analysts said.

“The Philippines needs to grow almost 6.1% for the remaining three quarters to reach 6% growth for the entire year, which appears to be a tall order, particularly given the slowdown in household spending in quarter one and the subdued global economic backdrop this year,” Makoto Tsuchiya, an economist at Oxford Economics Japan, said.

Philippine gross domestic product (GDP) grew by 5.7% in the first quarter, slightly faster than the 5.5% in the fourth quarter of 2023 but below the government’s 6-7% target.

University of Asia and the Pacific Senior Economist Cid L. Terosa said GDP growth should average 6-6.5% for the rest of the year to hit the lower end of the government’s target band.

“We had always been expecting growth to stay subdued largely due to the ‘triple threat’ faced by the economy. Elevated inflation, high borrowing costs and fiscal consolidation are the troika of challenges we face,” ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said.

Household spending, which accounts for nearly three-fourths of economic output, rose by 4.6% in the January-to-March, the slowest since the coronavirus pandemic and weaker than 5.3% in the fourth quarter and 6.4% a year ago.

Mr. Tsuchiya said private consumption lagged due to “economic-wide” pressures on spending in the first three months of the year.

“We believe the softening in household consumption was due to a combination of elevated inflation, tepid confidence and the impact of monetary tightening,” Mr. Tsuchiya said.

Inflation quickened to 3.8% in April amid rising food and transport costs. April was the third straight month that inflation accelerated.

National Economic and Development Authority (NEDA) Secretary Arsenio M. Balisacan has said household spending was tempered by higher food costs and the El Niño dry weather. Agricultural damage caused by El Niño has reached P5.9 billion, according to the Department of Agriculture.

Private consumption in the first quarter also reflected consumers’ weaker purchasing power and real income amid persistent inflation, Mr. Terosa said.

High interest rates have also restrained economic activity, according to analysts.

The Bangko Sentral ng Pilipinas (BSP) has kept policy rates at a 17-year high of 6.5% since October 2023 to curb inflation.

“Households are also faced now with a much higher level of debt, with consumers forced to borrowing on their credit cards and through salary-based loans just to make ends meet,” Mr. Mapa said.

He also noted that consumer savings have yet to recover to pre-pandemic levels, citing the BSP’s latest Consumer Expectations Survey.

The central bank earlier said it would consider first-quarter GDP growth at its policy review on Thursday.

Household spending, while improving on a quarterly basis, has yet to return to pre-pandemic levels, Pantheon Macroeconomics said. It also noted that remittance growth could only provide limited support for consumer spending.

“Remittance growth — in peso terms — is unlikely to provide much support this year, if any; consumer confidence is deteriorating rapidly; and finances remain very fragile due to the multiple hits to savings since 2020,” it said.

Despite this, Pantheon Macroeconomics noted that the latest GDP figure is not alarming enough for the central bank to cut policy rates. It expects the BSP to start easing in August, with 75 basis points worth of cuts this year.

Mr. Mapa said higher borrowing costs also weighed on investments, as seen in the 1.3% growth in the first quarter from 11.6% in the previous quarter.

“Construction was boosted nicely by double-digit growth of public construction, but private construction remains relatively lackluster with only single-digit growth,” he said. “Some may attribute this to changes post-pandemic. However, I believe it will be hard to ignore the role of elevated borrowing costs in the investment picture.”

Growth in state spending also slowed to 1.7% in the first quarter.

“National Government spending was always expected to stay soft with fiscal authorities in consolidation mode and as they move to lower debt levels relative to GDP,” Mr. Mapa said.

However, GDP growth could pick up in the second quarter due to base effects, Mr. Tsuchiya said.

Pantheon Macroeconomics said first-quarter growth was “firmer than expected,” thus raising its full-year GDP forecast to 5.2% from 4.8%. However, this is still lower than the 5.5% growth posted last year.

“In the coming months, particularly up to the end of the second quarter, inflationary pressures, the high interest rate environment, geopolitical tensions and global economic apprehensions will continue to cast a shade on Philippine economic performance,” Mr. Terosa added.

Mr. Mapa estimates full-year GDP growth to settle at 5.4%, below the government’s target. “Business sentiment is less favorable. However, we could see a rebound should we tackle the triple threat effectively.”

Source: Business World