Spending Growth Remains Stable As Inflation Remains Manageable Albeit Elevated
Key View: We hold a positive outlook for consumer spending in the Philippines in 2024 and 2025. While household spending already recovered to the pre-Covid levels in 2022, the rate of increase slowed in 2023. For 2024, we expect an acceleration, driven mostly by easing inflationary pressures, a stable labour market and lower interest rates. Risks to this outlook include prolonged inflation, lower remittances, and a weakening of the domestic economy. All of these risk factors adversely affect household purchasing power. Geo-political tensions (e.g., the Israel-Hamas conflict) have also emerged as a risk that is likely to impact inflation and interest rates.
Consumer Spending Outlook For 2024 & 2025
We hold a positive outlook for consumer spending in the Philippines, with an acceleration in real household spending growth - from 5.1% in 2023 to 6.2% in 2024. In real terms, we expect household spending to grow to PHP12.7trn (at 2010 prices). Spending will remain influenced by the elevated inflationary pressures seen over 2023 as well as currently high debt levels, along with related debt servicing costs.
Over 2025, household spending will hold steady, growing 5.9% y-o-y in real terms to a value of PHP13.5trn (at 2010 prices). Easing inflation and a tight labour market will support spending, as real wage growth returns to positive territory, which will support purchasing power over the year.
Growth Remains Robust Over 2024 And 2025
Philippines - Total Household Spending, real % y-o-y (2018-2028)
f = BMI forecast. Source: National statistics, BMI
Weakest Consumer Confidence Reading Since Q4 2021
Although consumer confidence in the Philippines remains sluggish, there has been some upward momentum as the market continues to recover from the pandemic years (when consumer confidence registered at -54.5). In Q2 2024 (latest available data), consumer confidence stood at -20.5, the weakest reading since Q4 2021. The recent weakness in consumer sentiment is driven by concerns over accelerating price hikes for goods and household expenses as well as falling incomes, job availability and doubt over government policy effectiveness.
Consumer survey result were mixed for Q2 2024 and will continue to be so over the next 12 months. While consumers anticipated a rise in interest rates and inflation over the next 12 months, their view on the unemployment rate was improved for Q1 2024 and Q2 2024. However, their sentiments were that the rate of unemployment would again rise over the next 12 months. This view on interest rates and inflation is likely due to the recent rise in food inflation as well as geopolitical tensions in the Middle East.
Food inflation is set to subside by the end of Q2 2024, as the El Niño weather pattern that has been responsible for deficit supply in Q1 2024 will end by then. The unemployment rate will remain high through Q2 2024, partly due to low employment in agriculture. This should rate should decrease as the year progresses.
Over the next 12 months, consumer intentions to buy durables and motor vehicles will be lower. However, their intention to buy a house will be higher. This comes as expectations of a rate cut rise, which would make housing more affordable.
Consumer Confidence Remains Weak
Philippines - Consumer Confidence (2019-2024)
Source: Bangko Sentral ng Pilipinas, BMI
Insights Into Consumer Spending
Our 2024 forecast for year-on-year growth in consumer spending is in line with our Country Risk team's expectation that the economy will grow by a real rate of 6.2% y-o-y. This is below the government growth target range of 6.5%-7.5%. A deteriorating external demand will likely be a drag on the Philippines’ GDP. However, the private final consumption expenditure will be positive, with growth of 4.7% expected. This is an acceleration from the 4.1% growth seen in 2023. Easing inflationary pressures will provide relief to real household incomes and enable growth in spending.
We expect inflation to fall from 6.2% in 2023 to 3.2% in 2024. This falls within the Bangko Sentral NG Pilipinas range of 2.0%-4.0%. While the central bank will likely be in a position to cut rates, we expect it will follow the US Fed. Any delays in rate cuts in the US will directly impact the timing of rate cuts in the Philippines. This has implications on the outlook for the peso.
We forecast the Philippine peso to depreciate against the US dollar (i.e., from an average of PHP55.6/USD in 2023 to PHP57.0/USD in 2024). This is a relatively stable outcome compared with the depreciation of 11.0% seen in 2022 and the 2.0% seen in 2023. This stable rate in 2024 is due to the combination of a lower expected consumer price index in the Philippines as well as uncertainly in the US regarding the implementation of rate cuts and the Philippines' likelihood of following the US Fed rate cuts. The stable rate has both positive and negative implications. Since the Philippines remains heavily reliant on imports to meet local demand, this will provide some relief to keep import inflation in check. However, the foreign exchange boost to remittances from overseas will be low in 2024.
Philippines - Economic Overview
| 2023e | 2024f | 2025f |
Real GDP (% change y-o-y) | 5.6 | 6.2 | 6.7 |
Unemployment (% of total labour force) | 4.4 | 3.8 | 4.2 |
Consumer price inflation (% y-o-y, average) | 6.2 | 3.2 | 2.9 |
Average exchange rate (PHP per USD) | 55.6 | 57.0 | 55.8 |
e/f = BMI estimate/forecast. Source: National sources, BMI
Inflation Outlook
Inflation has remained elevated in the Philippines, averaging 6.2% y-o-y in 2023. However, it declined to 2.7% y-o-y by January 2024. The most recent reading for June 2024 was again higher, at 3.7% y-o-y. This increase was due to food inflation, reflecting lower agricultural supplies as a result of the El Niño phenomenon, which has resulted in hotter, drier weather with low rainfall in the Philippines.
Our Country Risk team forecasts inflation will maintain at this level, averaging 3.2% y-o-y and 2.9% y-o-y over 2024 and 2025 respectively. Consumers still need to become used to higher than usual inflation in the short term - pre-Covid (2015-2019) inflation average 2.8%. If nominal income growth does not keep pace with inflation, the purchasing power of consumers will deteriorate, which would be a drag to their spending.
Prolonged inflation, particularly in relation to food, will mean that consumers will have to increasingly allocate more of their disposable income towards meeting basic necessities. The end of El Niño by June 2024 and the start of La Niña should create a cooler weather pattern for increased agricultural supplies. This should likely ease food related inflationary pressures.
Risks to our consumer spending forecast stem from the possibility that inflation remains elevated for longer than we currently expect, thereby potentially eroding purchasing power. Geopolitical risks are also evident, given the current tensions in the Middle East (e.g., between Iran and Israel). If oil prices rise from current levels due to geopolitical tensions, inflation is likely to continue for longer.
Inflation Remains Stubbornly Above Pre-Pandemic Average
Philippines - Consumer Price Inflation, % y-o-y (2019-2025)
Source: Philippines Statistics Authority, BMI
Remittance Outlook
Remittances are an important source of income for many households in the Philippines. The demand for overseas Philippine workers continues to increase globally, particularly for workers skilled in jobs related to medical and health services, construction, and housekeeping. The Philippines' remittance income totaled around USD37bn in 2023, up some 4.0% from the almost USD36bn reported in 2022. The latest data, for May 2024, indicate that cash remittances to the Philippines grew to USD2.6bn, up around 3.6% y-o-y.
There are several risks to this income over 2024, most of which are related to potential financial stress in several global markets, especially the US, which accounts for around 41% of total remittances. Singapore is the second largest source of remittances for the Philippines, at around 7%. This is followed by Saudi Arabia at roughly 6%, Japan and the UK, both at around 5%. Another risk is the strengthening of the peso, which could reduce the amount sent back by overseas workers in local currency terms.
Remittances Are Stable But Currency Risk Remains
Philippines - Remittances, USDmn (2020-2024)
Source: Bangko Sentral ng Pilipinas, BMI
Employment Outlook
Many markets have experienced robust labour market dynamics since the Covid-19 pandemic. These have been driven by rapid economic recoveries both locally and globally. Governments have supported local labour markets, leading to a tightening that has supported the rise in nominal wage. Although inflation has eroded real income gains, the strong labour market remains a principal driver behind consumer spending growth over 2024. However, as major markets and economies decelerate in 2024, we anticipate a general rise in unemployment rates heading into 2025. Diminished levels of personal savings, which previously served as a cushion to uphold current consumption patterns, will necessitate that households re-orientate their purchasing behaviours and reduce their expenditure – either by shifting to lower price points, or by acquiring fewer goods at similar spending levels. Consequently, rising unemployment is a key risk to our consumer outlook for the remainder of 2024 and into 2025.
As with many other markets, the Philippines has experienced strong labour market dynamics since the Covid-19 pandemic. These were driven by the rapid economic recoveries that took place both locally and globally. The Philippines government was supportive of local labour markets, which resulted in a tightening that pushed up nominal wages. While inflation has eroded real gains in incomes, the strong labour market was a major driver behind consumer spending growth over 2022. Although this effect reversed somewhat in 2023, for most economies, with rising unemployment rates, the Philippines was an outlier due to its initiatives in employment generation for meeting its poverty reduction targets. The Philippines' unemployment rate reduced from 5.4% in 2022 to 4.4% in 2023, compared with the pre-Covid average of 5.6% over the 2015-2019 period.
We expect the unemployment rate to further improve to 3.8% in 2024, driven by multiple government initiatives such as the Enterprise Productivity Act, the Apprenticeship Bill and the Lifelong Learning Bill. These initiatives are aimed at improving the employability of the Philippines population, promoting economic liberalization in order to enhance the overall business climate and attract more overseas investments, and establish public-private partnerships for an acceleration in the country’s infrastructure development. These drivers will likely remain in place over the medium-to-long term, and we expect further improvements in unemployment rates through the 2024-2028 period. Over 2025, we forecast unemployment to average 3.8%, as the labour market remains tight.
The key risk to the improving unemployment rate in 2024 and 2025 comes from the recent rise in unemployment in agriculture due to reduced activity. Despite this risk, we expect the change in weather patterns to be supportive and boost employment by the end of Q2 2024. Another medium- to long-term risk is a slowdown in government initiatives.
Unemployment Rates To Stay Below Pre-Pandemic Levels
Philippines - Unemployment, % of labour force (2018-2025)
Source: Philippine Statistics Authority, BMI
Household Debt Outlook
A high level of household debt remains a risk to our consumer outlook, as it not only constrains future borrowing capacity but impacts current disposable income levels. This is particularly true as debt servicing costs rise in response to increases in interest rates. In many markets, central banks rapidly hiked interest rates during the 2022-2023 high inflationary period, reaching levels to which most households have not been accustomed over the past decade. Most markets have now reached terminal interest rates, with many central banks expected to start loosening rates over Q4 2024 and into 2025. While interest rates will not reach the previous historical lows of the last decade, easing monetary policy will alleviate some debt servicing cost pressures.
For the Philippines, the Covid-19 pandemic caused a change in household consumption patterns between 2020 and early 2022. Due to mass unemployment, especially in the services sector, the country experienced a recession. Many households were forced to apply for credit and government aid in order to pay for essential items. Following the relaxation of restrictions, consumer lending started to decline, especially with respect to salary-based loans and unsecured debt. Even before this, the Philippines already had low exposure to loans, with the household debt-to-GDP coming in at 10.1%.
While household debt levels have started to increase, with consumer loans rising 2.7pp y-o-y to 21.0% in Q4 2023, the quality of loans is also improving, with non-performing loans (NPL %) as a percentage of loans for consumers decreasing 80 basis points (bps) to 5.8%. The Q4 2023 NPL % level was only slightly above the pre-Covid average of 5.5% for the 2015-2019 period. Credit cards are now performing better, with NPL % at 4.0% in Q4 2023 compared with the pre-Covid level of 4.2% for the 2015-2019 period. This year-on-year performance indicates an improvement in debt servicing despite the 100bps rate hike implemented by the central bank. By the end of 2024, we expect that the central bank's key rate will fall to 5.75%.
Interest Rate Remains Manageable
Philippines - Household Debt Vs Interest Rates (2016-2024)
Source: CEIC, BMI
Wider Economic Challenges
The broader economic challenges confronting households and consumers continue to emanate from the re-opening of economies following the Covid-19 pandemic.
Inflationary pressures are being driven by both demand-pull and cost-push factors. In an effort to reduce inflation, central banks have implemented policy rate increases at some of the most rapid paces in history. This has decreased the value of debt accrued during the historically low interest rate period over 2015-2019. While household wealth has reached historic highs, supported by robust equity market performance and higher house prices, some property markets are now showing signs of weakening, and company forward-looking outlooks are increasingly negative. Should this trend intensify, a significant decline in consumer wealth could lead to a rapid reduction in consumption.
In conjunction with quantitative easing, financial institutions are dealing with liquidity challenges and severe interest rate risks. Elevated geopolitical and economic uncertainties will be a primary concern for consumers in 2024, with the potential to rapidly influence the sector – either directly, by undermining purchasing power, or indirectly, through dampened consumer confidence. The economic trajectory of numerous markets in the post-Covid recovery phase underscores the risk of rising unemployment and its consequent impact on our short-term consumer outlook. The following graphic highlights the key risks to our consumer outlook for 2024.
Philippine Households Still Exposed To Global Risks
Global Risks To Outlook
Source: BMI
Source: Fitch Solutions
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