Private consumption growth in the Philippines has slowed to its lowest rate since 2010 outside the pandemic period. The main culprit is worsening confidence, which has been hit particularly hard by persistent inflation. Although inflation should subside later in the year, the impact on consumer sentiment will take time to feed through, so we don't expect a substantial boost in spending this year.
◼ Consumer confidence has been worsening since mid-2022, particularly in the outlook component. Even though confidence in the current quarter has held up expectations about the future affect the present, as consumers tighten their wallets in anticipation of worsening economic conditions.
◼ Surveys show the uncertainty stems from concerns about future inflation. The nature of recent food-driven inflation also has implications for confidence, as households tend to feel the price impact from nondiscretionary daily items more acutely.
◼ We expect inflation to moderate after the summer given favorable base effects. However, disinflation is unlikely to boost spending substantially, and any uplift will take time due to the lagged nature of inflation expectations formation.
◼ Inflation expectations are also downwardly rigid and could stay elevated for longer because households care most about price levels, rather than annual growth rates.
Private consumption in the Philippines has been slowing since the start of 2022. Arguably, some of the slowdown is due to waning base effects after the pandemic, but Q1 growth of 4.6% y/y is below the pre-pandemic trend. Meanwhile, we have seen few signs of a worsening labor market or lending data. We therefore think the slowdown in consumption growth has been largely due to people's perception of risks and the associated changes in behaviors.
Consumers are turning more uncertain about the future
In its quarterly confidence survey, the central bank asks respondents about their confidence in the current quarter, the next quarter, and four quarters ahead. Results show that compared to the 2022 average, Philippine consumers are turning more pessimistic about the future, while their assessment of the current quarter has been largely unchanged (Chart 1).
This pattern of worsening confidence further into the future is common across different income brackets, which implies the drop in confidence is a broader macroeconomic issue, rather than one pertaining to a specific group.
Economic conditions are deteriorating, but families' financial and income perceptions are holding up
The same survey asks its respondents about their outlook on different metrics of the economy, which can help us interpret where the fall in confidence is coming from. Examining these responses in detail reveals the deterioration in confidence is led by the pessimism around economic conditions (Chart 2).
Despite a bleaker outlook, two other metrics – family financial situation and family income – have been holding up well.
Indeed, consumer lending growth has been strong and settled at 25.3% y/y in April, compared to 19.3% average in 2015-2019. A different survey on bank loan officers suggests credit standards are neutral, and the capital adequacy ratio is healthy at 17% as of Q3 2023 – higher than both the threshold set by the central bank and the pre-pandemic trend.
On income, labor market data don't suggest any weakening. Although the rise in part-time and self-employed workers suggests their earnings situation hasn't improved as much as headline employment numbers indicate, the number of full-time employees has increased, and the unemployment rate has edged down since 2022. Moreover, in the latest round of the confidence survey, more respondents expect the number of unemployed to decrease than increase over the coming year.
Inflation remains a key concern
Concerns over economic conditions stem from high inflation rather than expectations of slowing growth, in our view. Although we don't have data on consumer expectations for growth, consensus forecasts give us some ideas. The latest growth consensus for the whole year is 5.7% – the same rate of growth as in Q1.
This suggests steady growth rather than a slowdown for the rest of the year. The outlook for private consumption implies a pickup in growth. If the consensus forecast is any guide, consumers do not appear to be overly concerned about the growth outlook.
We therefore believe inflation is at the top of households' concerns. After rising for much of 2022, inflation remained sticky throughout 2023 and jumped higher at the start of 2024. Although there are some technical factors at play such as base effects, the recurring bursts of inflation are likely raising household caution, which is showing up in inflation expectations data (Chart 3).
Households are expecting the inflation rate to keep rising from here, which is likely adding to the pessimism as higher inflation erodes real purchasing power. A different question from the same survey suggests the share of households expecting to save is on an upward trend. Moreover, recent inflation has been driven mainly by food prices, which has important implications for inflation expectations as households tend to feel the price impact from daily items such as food more acutely. (Chart 4).
So an inflationary shock has a disproportionate effect on consumer's price perceptions, which in turn affects their spending behavior. At the same time as saving, households cut back on discretionary spending while allocating more money towards food. Already, Philippine households are expecting to spend more on food and less on other items such as recreation and hotel and restaurants (Chart 5).
Inflation expectations will likely stay higher for longer
We expect inflation to come down later this year amid favorable base effects. In particular, we expect food inflation to end the year at 3.4%, the lowest level since Q1 2022 on a quarterly basis. But the lagged impact of inflation expectations suggests they may take longer to come down even after actual inflation slows (Chart 6).
Inflation expectations are also downwardly rigid. This is partly because households pay more attention to the level of prices, not growth. Indeed, although we expect a moderation in the inflation rate, we estimate the price level at the end of 2024 will be 22% higher than the 2020 level. For food, it's even higher at 26%.
On top of this, recurrent supply shocks over the past few years might have made households more cautious. If so, they might be reluctant to change their behavior and remain frugal long after prices have stabilized. This could result in an even greater lag this time, with inflation expectations weighing on spending for longer.
All in all, despite our expectation of sustained disinflation, we don't expect it will result in a quick rebound in consumer spending. Any meaningful recovery is likely to be delayed until next year, and this year's growth will likely remain soft amid subdued domestic demand and tepid global growth.
Source: Oxford Economics
