Credit Suisse cuts Philippines GDP forecast to 6%

MANILA, Philippines - Credit Suisse has lowered its gross domestic product (GDP) growth forecast for the Philippines to six percent instead of 6.4 percent this year amid the projected weak private consumption and slower exports.

Michael Wan, economist at Credit Suisse, said in the bank’s latest fixed income research titled “Philippines – consumer pains: Turning negative on GDP” that private consumption will moderate further due to an unusually weak labor market.

“We now expect the Philippines’ GDP to surprise on the downside in 2017, which contrasts with our previous positive view on growth,” he said.

Weak private consumption pulled down the GDP growth to 6.4 percent in the first quarter of the year from 6.6 percent in the fourth quarter of last year.

Despite the slowdown, the Cabinet-level Development Budget Coordination Committee decided to retain the GDP growth target at 6.5 percent to 7.5 percent this year.

Wan said employment growth has declined sharply over the past two quarters as a significant number of workers dropped out of the labor force amid the uncertainty in the lead-up to “endo,” weak government spending year-to-date and the K-to-12 education reform.

He said growth in private consumption is expected to moderate further to 5.7 percent instead of 6.5 percent for this year amid the negative impact of a weaker labor market.

Likewise, he added, exports are likely to moderate in the second half while fixed investment is unlikely to accelerate as the implementation of big-ticket public infrastructure projects would remain disappointing.

Wan said government spending slowed significantly to 1.9 percent in the first quarter of the year from 15 percent in the fourth quarter last year due to base effects from election related front-loading.

Credit Suisse sees investments growing 10.5 percent this year from a high base of 25 percent last year as it remained quite robust at 12 percent in the first quarter from 19 percent in the fourth quarter.

“We do not expect other items in GDP to offset weaker private consumption,” Wan said.

Due to the lower GDP growth projection, the economist said Credit Suisse now expects the Bangko Sentral ng Pilipinas (BSP) to keep interest rates steady for the rest of the year.

“With GDP likely slowing further from here and private consumption looking less robust, we now expect the central bank to keep rates on hold in 2017 from our previous forecast of one hike in the second half of 2017,” he added.

The BSP’s Monetary Board has managed to keep an accommodative policy stance on the back of robust domestic demand and the benign inflation environment. It last raised interest rates by 25 basis points in September 2014 despite external shocks such as the decision of United Kingdom to leave the European Union and the normalization of interest rates by the US.