The Philippine government should focus on managing persistent inflation in the coming months to support household spending growth, analysts said.
University of Asia and the Pacific Senior Economist Cid L. Terosa said elevated inflation was the “culprit” for muted consumption seen in the second quarter.
“Consumption will start to pick up towards the last quarter of the year, but it might remain muted if inflationary pressures persist and potential risks manifest,” he said.
The Philippine economy grew by 6.3% in the second quarter as higher construction and investment growth helped offset slower consumption.
Household final consumption expenditure grew by 4.6% in the second quarter, slowing from 5.5% a year ago.
Headline inflation accelerated to 4.4% year on year in July, mainly driven by a spike in electricity rates and food costs. This was the fastest inflation print in nine months.
In the first seven months of the year, headline inflation averaged 3.7%, above the central bank’s 3.3% full-year forecast.
Michael L. Ricafort, chief economist at Rizal Commercial Banking Corp., said the slowdown in consumer spending could largely be attributed to high inflation.
Increased borrowing costs reduce the purchasing power of consumers, “forcing some of the poorest of the poor and some people from the middle class to save and prioritize basic necessities such as food, shelter, utilities, transport fares, among others,” he said.
The Bangko Sentral ng Pilipinas (BSP) has kept policy rates at a 17-year high of 6.5% since October 2023. From May 2022 to October 2023, the BSP hiked borrowing costs by a total of 450 basis points to tame inflation.
Diwa C. Guinigundo, GlobalSource Partners’ Philippines analyst and former central bank deputy governor, said well-anchored inflation expectations could help provide additional incentives for higher consumption.
In an e-mail, he cited the need to improve households’ access to credit by easing lending standards without compromising standards.
“[Household spending] can be encouraged by ensuring better access by households through a better, more efficient system of the banks in being able to know their customers,” he said.
Emy Ruth Gianan, who teaches economics at the Polytechnic University of the Philippines, said targeted subsidies for various sectors may be needed in the short term to address anemic household spending.
“Note that households are most likely tight on spending because they do not see prices going down any sooner,” she said. “If we give them a signal that they can spend even at a fraction of the cost, then maybe we could boost consumption.”
FOOD INFLATION
Filomeno S. Sta Ana III, coordinator at Action for Economic Reforms, called on the government to come up with a strategic plan to boost agricultural productivity and address rising prices of food, which constitute around 43% of total household expenditures.
“Government’s reduction of food import tariff, particularly rice tariff, provides some alleviation, but is a temporary solution,” he said.
President Ferdinand R. Marcos, Jr. in June signed an executive order which slashed tariffs on rice imports to 15% from 35% previously, until 2028.
Security Bank Corp. Chief Economist Robert Dan J. Roces said the government should focus on addressing the challenges facing the agriculture sector.
“While the economy is on a solid footing, challenges such as the agriculture sector’s continued weakness and potential global economic headwinds require careful management,” he said in a Viber message. “This could indicate challenges in food production or rural economic activities.”
In the second quarter, agriculture and fisheries output contracted by 3.3%, worsening from the 1.2% decline a year earlier, reflecting the impact of El Niño.
Farm damage caused by El Niño reached P15.3 billion, according to the final estimate issued by the Department of Agriculture.
HEALTHCARE COSTS
Meanwhile, Mr. Sta Ana said inadequate social services, especially for healthcare, “make the situation all the more distressing for the population” amid high food prices.
He noted that out-of-pocket expenses for health are equivalent to 46% of total current health expenditures.
“A World Bank figure shows that a previous trend of decreasing out-of-pocket expenses as a percentage of current health expenditure has recently been reversed,” he said.
Aside from healthcare, education is also one of the most expensive items among household expenses.
“To the extent that more public money is made available to expand such public services, the way this is done in other jurisdictions, that would be most helpful to households,” Mr. Guinigundo said.
Ms. Gianan said concerns over the affordability of healthcare and the lack of access to it force households to plan well ahead for future expenses.
“Young people tend to spend more than their elderly counterparts, and spending smooths out throughout the life cycle as people save more for their retirement and other life needs,” she said in an e-mail.
“This is compounded by the fact that we have underdeveloped social services which compels people to really look out for themselves,” she added.
Source: Business World
