Growth forecasts mixed as interest rate hikes bite

MANILA, Philippines — The Philippine economy grew at a slower pace in the first quarter, but a softening inflation turnout has convinced some economists that full-year growth in 2023 could be higher than what was earlier expected.

The Philippine Statistics Authority reported on Thursday that gross domestic product (GDP) expanded by 6.4 percent in the first quarter, the slowest in two years, coming from 7.1 percent in the fourth quarter and eight percent in the same quarter last year.

This, however, was slightly faster than the 6.1 percent median market expectation.

Jun Neri, lead economist at the Bank of the Philippine Islands, said the bank has adjusted upward its GDP growth forecast for this year to 6.3 percent from 5.9 percent amid the continued inflation downtrend.

“We have adjusted our full-year GDP forecast to 6.3 percent given the latest print and also the improving outlook for inflation,” he said.

“So far, pent-up demand has been able to offset the impact of inflation. With inflation slowing down, the economy may be able to sustain its growth above six percent. Weaker pressure on the margins of businesses may give them the opportunity to focus more on capital spending. Consumers may be able to spend more on discretionary items,” Neri added.

Inflation eased for the third straight month to hit its lowest level in eight months at 6.6 percent in April.

However, Neri said a downside risk for growth this year is the elevated level of interest rates.

“Monetary policy works with a lag, and the full impact of the rate hikes will only be felt in the latter part of the year,” he said.

The Bangko Sentral ng Pilipinas (BSP) Monetary Board has raised interest rates by a cumulative 425 basis points that brought the overnight reverse repurchase rate to a 16-year high of 6.25 percent, from an all-time low of two percent, to tame inflation and stabilize the peso.

UK think tank Pantheon Macroeconomics also raised its GDP growth forecast for this year following the better-than-expected outturn in the first quarter.

“The [first quarter] result was much stronger than we expected, so we have raised our full-year growth forecast to 5.5 percent, from 4.5 percent previously,” Pantheon Macroeconomics chief emerging Asia economist Miguel Chanco said in a report.

But while Pantheon upgraded its GDP forecast for the Philippines for this year, Chanco said “the outlook for consumption still is tough.”

Household final consumption expenditure grew by 6.3 percent in the first quarter, slower than the seven percent in the previous quarter and 10 percent in the first quarter last year.

Chanco said a repeat of the household consumption seen in 2022 is unlikely, citing the fragile state of savings and unwinding of growth in remittances in local currency terms.

“Alongside these headwinds is the irreplicable nature of consumers’ debt binge, which in 2022 helped to keep spending robust amid rising inflation,” Chanco said.

He said growth in household loans hit a ceiling, sliding to 21.3 percent year-over-year as of March, from the 25.1 percent peak in December.

In a separate note, BMI Country Risk & Industry Research, formerly Fitch Solutions, said Philippine economic expansion is seen slowing further over the coming quarters as the lagged impact of interest rate hikes delivered by the BSP weigh more heavily on domestic activity.

According to BMI, the tightening monetary setting with another 25-basis-point hike would pose increasing headwinds to investment growth.

“Subsequently, we think that interest rates will be kept at a multi-year high of 6.50 percent throughout 2023, with rate cuts only possibly materializing in 2024. High interest rates will continue feeding through to the economy, acting as a drag on investment appetite,” BMI added.

Aside from the lagged impact of rate hikes, the unit of the Fitch Group said the weakness in external demand would drag on exports.

The research arm is retaining its GDP growth forecast for 2023 at 5.9 percent, slightly below the six to seven percent target penned by economic managers via the Development Budget Coordination Committee.

“In light of the latest numbers, we are retaining our 2023 growth forecast at 5.9 percent. Our forecast implies that we are expecting real GDP growth to remain on a slowing trend over the coming quarters,” BMI added.

BMI sees inflation slowing to four percent this year, the upper end of the BSP’s two to four percent target range, from 5.8 percent last year, but still higher than the 3.4 percent average between 2010 and 2020. — Louella Desiderio