The Philippine economy faces challenges in meeting its growth and inflation targets for the current year and beyond, warns Vincent Conti, a senior economist from S&P Global Ratings. The economist points to a variety of factors contributing to this potential outcome.
While S&P Global Ratings had been forecasting a 2023 GDP growth slightly below 6 percent since the latter part of the previous year, the latest estimates indicate that the growth rate could be around 5.9 percent due to the weak second quarter performance. The Philippines experienced a drop in GDP growth from 6.4 percent in the first quarter to 4.3 percent in the April-June period, largely attributed to a contraction in government spending.
Factors contributing to the relatively slower growth projection include the maturing of post-pandemic recovery, which has led to slower consumption growth, and the impact of rising prices on purchasing power. Additionally, the delayed effects of interest rate hikes and the persistent weakness in export demand, especially in the electronics sector, have further contributed to the moderated growth outlook.
S&P Global Ratings also projects that economic growth could continue to fall short of targets in 2024, with an expected expansion rate of 5.9 percent. This projection is based on factors such as sluggish global demand, increased interest rates, and the gradual fading of the post-Covid economic opening.
In terms of inflation, S&P Global’s projections are slightly higher than those of the Bangko Sentral ng Pilipinas (BSP). While the BSP recently revised its outlook to 5.6 percent, S&P Global expects the average inflation rate to be around 5.9 percent for the year. The central bank adjusted its inflation projection upwards due to the impact of rising oil prices. Projections for the years 2024 and 2025 have also been revised to 3.3 percent and 3.4 percent, respectively.
Despite these challenges, the BSP anticipates that monthly inflation will return to the target range of 2.0 percent to 4.0 percent by the end of the year. After reaching an 18-year high of 8.7 percent in January, inflation has cooled down over the past six months, settling at 4.7 percent in July. However, analysts caution that recent typhoons and significant fuel price increases could reverse this trend in the coming months.
S&P Global and the BSP both concur that inflation is expected to align with target levels in 2024. The BSP, which initiated multiple key interest rate hikes beginning in May of the previous year to counter rising inflation, indicated that economic activity might further moderate due to these monetary tightening measures and weak global growth prospects. Although the central bank has paused further rate hikes in recent policy meetings, it remains open to resuming rate increases to ensure price and financial stability.
