Despite rising inflation, government sees growth spurt

MANILA, Philippines — While 2022 is the year when restrictions that limited mobility and business activity due to the COVID-19 pandemic were eased, the Philippines, like many other countries, also had to battle with rising inflation.

Despite seeing high inflation numbers, the government believes the economic performance could exceed the growth target set for 2022 as consumption has continued to hold up and fuel growth.

But with growth widely expected to be slower in 2023 due to high inflation, rising interest rates, and looming recession in advanced economies, the government sees the need to continue measures to address high prices, while having strong focus on infrastructure, education, agriculture, and climate change mitigation to safeguard growth.

At the beginning of 2022, the Philippines saw a surge in COVID cases due to the highly contagious Omicron variant, prompting the government to place areas including Metro Manila under the stricter Alert Level 3, which allowed certain economic activities to operate at 30 percent indoor venue capacity for fully vaccinated individuals and 50 percent outdoor venue capacity, and prohibited those considered high risk for transmission.

As COVID cases declined, restrictions were eased.  In February, the government removed quarantine requirements for vaccinated foreign travelers.

Later in August, the country also saw the resumption of face-to-face classes.

“The past year saw our economy steadily recover from the impact of the COVID-19 pandemic. After two years of restricting movement and commercial activity, the country successfully reopened our economy while effectively rolling out the public vaccination program to mitigate risks of infection and death,” National Economic and Development Authority Secretary Arsenio Balisacan said.

After five successive quarters of gross domestic product (GDP) contraction since the first quarter of 2020 amid pandemic-induced restrictions, he said the country has seen six consecutive quarters of robust economic growth, or growth of at least seven percent since the second quarter of 2021 until the third quarter of 2022.

In the third quarter of this year, in particular, the economy grew by a faster-than-expected 7.6 percent, bringing the average growth to 7.7 percent from January to September.

Balisacan said the country would have seen a much faster economic performance if not for high inflation.

The Philippine Statistics Authority earlier reported that the country’s headline inflation rate accelerated to eight percent in November, the highest in 14 years.

From January to November, inflation averaged 5.6 percent, which is below the government’s assumption of 5.8 percent, but higher than the central bank’s two to four percent target for the year.

With strong growth expected in the fourth quarter, Balisacan believes the country’s economic growth would beat the government’s 6.5 to 7.5 percent target for 2022.

As for 2023, he said the government sees global headwinds, particularly the likely recession of advanced economies, and prolonged supply chain problems as the conflict between Russia and Ukraine continues.

High inflation and interest rates are also seen as downside risks to growth for 2023 as these could weaken consumption and investments.

With these headwinds expected to slow down the country’s economic growth for 2023, the government has downscaled its GDP growth target to six to seven percent from the previous goal of 6.5 to eight percent.

Even multilateral agencies expect Philippine economic growth to moderate in 2023, with the World Bank projecting a 5.4 percent GDP growth for the country from an expected 7.2 percent expansion in 2022.

As for the Asian Development Bank (ADB), it is forecasting a six percent GDP growth for the Philippines for 2023, slower than the expected 7.4 percent growth for 2022.

“The immediate challenge is to address high rising domestic inflation which will dampen household consumption and borrowing and investment,” World Bank senior economist Ralph van Doorn said.

He said addressing high inflation would involve using both monetary and non-monetary measures  including importation at lower tariffs to augment domestic supply of staples, providing support for agriculture production through extension of services, seeds and fertilizers, and using policy rate hikes.

The Bangko Sentral ng Pilipinas has so far delivered a 350-basis-point increase in the key policy rate to curb inflation and stabilize the peso.

Balisacan said the recently approved Philippine Development Plan, which will serve as the overall blueprint for socioeconomic development from 2023 to 2028, would address issues faced in the short term. These include protecting the people’s purchasing power given high inflation, mitigating the scarring in human capital due to the pandemic, and providing targeted assistance to the most vulnerable sectors.

Asian Institute of Management economist John Paolo Rivera said the government would have to exercise fiscal prudence and prioritize spending on projects that have multiplier effects.

For his part, ADB Philippines country director Kelly Bird said the multilateral lender is recommending that the country continues its infrastructure development program to support growth.

“It’s highly recommended. It’s continuing, which is great. It creates jobs, it improves connectivity and it helps to create safe and efficient public transport systems for Filipinos. So it has huge benefits,”  he said.

Bird said the country’s infrastructure spending at five percent of GDP should at least be continued for the next 10 years.

“Everyone recognizes there has been under-investment for infrastructure and it is going to be another 10 or 20 years of investments that are required to bring the Philippines up to global standards,” he said.

Rizal Commercial Banking Corp. chief economist Michael Ricafort said increased infrastructure spending would continue to be a major pillar of economic growth for the coming years as the new administration has signaled the continuity of the various infrastructure projects around the country.

For Van Doorn, it is also very important for the Philippines to sustain investments in health and education to address the pandemic’s scarring effects.

“The shocks of the pandemic have manifested themselves in child malnutrition and stunting and reduced student learning especially among the poor. If these effects are unmitigated, these shocks may have persistent impacts on people’s well-being and damage future productivity,” he said.

Ateneo de Manila University economics professor Leonardo Lanzona Jr. said the government needs to identify and reassess the weaknesses in the economic structure that were exposed by the pandemic.

He said the poor, in particular, were severely affected by the pandemic.

“We need to know how we can help support and restore whatever capabilities that we had before the pandemic,” he said.

While the country’s unemployment rate is back at the pre-pandemic level, having eased to 4.5 percent in October, the underemployment rate remains high at 14.2 percent.

Lanzona said the high underemployment indicates a decline in the quality of jobs in the country.

“Part of the problem is technology.  A lot of the workers are being replaced by cheaper digital technologies.  Programs on productive employment and skill development will need to be designed,” he said.

Given the challenge of food security, Van Doorn cited the importance of improving the agriculture sector’s productivity.

For the World Bank, effective public spending would address the low productivity of the country’s  agriculture sector, which had minimal contribution to growth in the last five years, but employs over 22 percent of the workforce.

As the Philippines is among the countries most vulnerable to climate change, the ADB believes investments should be made to mitigate its impact and promote resilience.

“When you do have floods, damages and so on, that means insurance companies, the government have to spend more on damages of climate. It is important now to both mitigate climate change, but also build infrastructure that makes the economy, the community more resilient to climate change.  Those investments are needed to mitigate against lower economic growth in the future,” Bird said.