More banks trim Philippine growth forecast

MANILA, Philippines — More banks are slashing their gross domestic product (GDP) growth forecast for the Philippines after a disappointing second quarter outturn, as well as the expected further slowdown in the second half due to soaring inflation and tighter monetary conditions.

Chua Han Teng, economist at DBS Bank Ltd., said the Singaporean Bank lowered its GDP growth forecast for the Philippines to seven percent from the original target of 7.5 percent for this year, still within the revised 6.5 to 7.5 percent target set by the Cabinet-level Development Budget Coordination Committee (DBCC).

“This reflects the deceleration in the second quarter and rising cost headwinds in the second half, assuming a moderation to pre-pandemic expansion of 6.2 percent,” Teng said.

He said the Philippines’ economic recovery momentum waned in the second quarter and underperformed expectations at a slower pace of 7.4 percent versus the revised 8.2 percent in the first quarter of the year.

This translated to a GDP expansion of 7.8 percent in the first half, slightly above the government’s 6.5 to 7.5 percent target.

According to DBS, the deceleration was mainly driven by a slowdown in private consumption to 8.6 percent from a record high of 10 percent, as higher inflation in the second quarter hurt purchasing power despite opening gains from looser restrictions in the post-pandemic crisis period.

“Even though the first half expansion of 7.8 percent year-on-year was still relatively strong and higher than the pre-pandemic trend of 6.2 percent, we think the second half will likely be tougher,” Teng said.

Teng explained the domestically driven economy would continue to face headwinds from high inflation that would curb discretionary spending.

“Households’ balance sheets have significantly improved from the crisis, but gains from pent-up demand driven by economic opening will start to dissipate. Higher borrowing costs from monetary tightening would feed through the economy,” the economist said.

The Bangko Sentral ng Pilipinas (BSP), DBS said, would likely maintain its hawkish stance for the rest of 2022 after raising key policy rates by 125 basis points, bringing the reverse repurchase rate to 3.25 percent from an all-time low of two percent.

It added the benchmark interest rate is likely to rise above the pre-pandemic level of four percent as the yet-to-peak and still rising inflation would keep policymakers resolute in their fight to tame increasing price pressures.

Inflation averaged 4.7 percent in the first seven months, exceeding the BSP’s two to four percent target range, after accelerating to 6.4 percent in July from 6.1 percent in June.

While softer economic growth might pare back expectations of aggressive future interest rate hikes, economic managers led by BSP Governor Felipe Medalla said that the economy is still able to handle further monetary tightening.

“We think that higher inflation priority over growth at this juncture should tilt the central bank’s near term decision toward frontloading interest rate hikes. The BSP is looking to make a strong effort to contain inflationary pressures and spillovers from currency weakness. Rising and elevated inflation could also in turn worsen economic growth if not contained,” Teng said.

Likewise, Ayala-led Bank of the Philippine Islands (BPI) also lowered its GDP growth forecast to 6.3 instead of 6.7 percent for this year.

BPI senior economist Jun Neri said that economic growth would have been higher in the second quarter if oil prices were stable, as the 50 percent jump in oil prices prevented both consumers and businesses from spending more on goods and activities.

Neri said the economy has shown resilience despite the headwind, as household consumption growth remained substantial at 8.6 percent despite the surge in consumer prices.

The 171-year-old bank is expecting a slower growth for the second half given the fading base effects as well as the impact of inflation.

“A sharp slowdown can be avoided, however, if the return of students to face to face classes and higher uptake in booster shots are seen in the coming months to boost the performance in the second half. Without these, the country’s recovery may lose its momentum. Given the latest print, we have revised our full year GDP forecast from 6.7 to 6.3 percent,” Neri said.