Slower

Before the invasion of Ukraine happened, most analysts thought a 7 percent GDP growth for the Philippine economy would be easy. Our economic managers were, in fact, forecasting a bolder growth figure of up to 9 percent.

Today, the forecasts are a lot more somber. The main culprit is the certainty that inflation will be elevated for the rest of the year.

The BSP is forecasting inflation at 4.3 percent, higher than the targeted band of 2 to 4 percent. One think tank forecasts inflation at over 5 percent.

Oil pricing is the wild card here. As a result of uncertainties created by the Russian invasion of Ukraine, oil prices shot up considerably the past weeks.

Although our consumers will enjoy a slight rollback at the pumps today, the oil price outlook remains bleak. Should the major economies decide to boycott Russian oil, prices worldwide will shoot up. One can only speculate on what the upper range of oil prices will be.

Fuel is a major factor in food pricing. When fuel is expensive, this will be a factor pushing up food prices. Transport cost is a large component of our food prices.

Higher fuel and food prices shrink consumer discretionary spending. When a larger share of purchasing power goes to fuel and food, consumers are not about to buy much else. This is the reason retail purchases, while it has been significantly higher with more relaxed health protocols, is still smaller than it was prior to the pandemic.

Analysts are also fretting about the effect of a much higher oil bill on the peso’s exchange rate. Should the peso weaken significantly, this will add to the factors pushing inflation up.

The war in Ukraine will significantly reduce global wheat supply. Ukraine is known as the breadbasket of Europe and the Middle East. The loss of wheat supply from both Ukraine and Russia will certainly push up prices for this commodity. Although we are primarily a rice-consuming society, we do import large amounts of wheat from abroad.

If it is any consolation, Southeast Asia and South America are the regions least affected by what is going on in Eastern Europe. Although we import almost all our oil, our region is largely food self-sufficient. While the Philippines (because of structural flaws in our agriculture) is the biggest importer of rice, volatility in prices and supplies are not forecast for the commodity.

Because of bold liberalization reforms completed by the Duterte administration, we have seen a surge in investment inflows. The liberalization of the retail trade, amendments to the foreign investments act and public services law along with the ease of doing business law will create a livelier business environment in the country, but it will take time for the beneficial effects to be felt. The difficulties posed by a more inflationary and more sluggish global economic environment are imminent.

The BSP has been quite adept in maintaining a low interest environment conducive to investments. This has been invaluable in stimulating the economy back to life after the ravages brought by the pandemic. But a rising inflation rate and pressure on the peso’s exchange value could force our monetary managers to change course.

Globally, major central banks have raised policy rates as part of a concerted effort to curb inflation. Higher rates, however, cool down investments and rein in growth. It is a vital tug-of-war between growing the economy and containing inflationary surges. Central bankers fear runaway inflation the most.

It is more likely that in the near term, policies that help contain inflation will have the upper hand. This means growth expectations will have to be tempered a bit.

The upbeat 7-9 percent GDP growth rate will be difficult to achieve this year. The global environment is simply inhospitable. Supply chains continue to be broken in many places. Uncertainty over the supply and pricing of vital commodities such as oil and food will make it risky for new businesses to jump in.

The ripple effects of the war in Ukraine can be felt in the most surprising places. For instance, the global auto industry is reporting a significant downturn in demand for new vehicles. This is a function of lower discretionary spending and higher fuel prices.

In our part of the world, the outbreak of COVID-19 infections in China adds to the dampeners for regional growth. Stubbornly sticking to its zero-COVID strategy, China had shut down its major city of Shanghai due to a surge in infections. There are reports that the bustling city of Guangzhou will be shut down as well.

The shutdowns of major urban and manufacturing centers will aggravate supply-chain disruptions. Since China contributes inputs to manufactures of nearly everything throughout the world, the disruptions will have wide global effects.

Last year, the Philippine economy grew by 5.6 percent. That is slightly above target. Last week, the PSA adjusted that growth figure to 5.7 percent after reviewing all the data. This makes our economy the growth leader in the region.

It is significant that in the fourth quarter of 2021, the Philippine economy grew by over 7 percent. This underscores our economy’s potential for growth. We have the correct policies in place. But we have to weather the uncertainties of the global environment.

Right now, however, the priority should be restraining the inflation rate. High inflation will undermine our ability to grow. It will penalize the lowest income earners. It will seed discontent among the poor.

A lower growth rate will be acceptable if it is matched by a lower inflation rate.