Philippines: Growth forecasts hiked as economy roars back

But UK think tanks not so bullish for 2023

MANILA, Philippines — The Philippine economy is expected to  grow by more than seven percent this year after roaring back in the third quarter despite soaring inflation and rising interest rates, economists said. DBS Bank Ltd. of Singapore raised its 2022 gross domestic product (GDP) growth forecast for the Philippines to 7.4 percent but maintained its 6.3 percent projection for next year.

Chua Han Teng, economist at DBS, said the Philippine economy stayed resilient this year despite multiple challenges from rising  inflation and interest rates as well as global headwinds.

“The archipelago’s growth is middle of the pack versus ASEAN peers,” Teng said.

On Thursday, the government announced a stronger-than-expected GDP expansion of 7.6 percent in the third quarter after slowing down to 7.5 percent in the second quarter.  The economy expanded by   8.2 percent in the first quarter.

But for UK-based think tanks, economic growth may slow next year with high inflation and rising interest rates likely to weigh on spending.

In a report, Pantheon Macroeconomics emerging Asia economist Miguel Chanco said the Philippines may post a slower economic growth next year despite expectations of a  stronger performance for this year.

Pantheon Macroeconomics also raised its 2022 growth forecast for the Philippines following the faster-than-expected third quarter economic performance.

He said they now expect the Philippine economy to grow by 6.8 percent for this year, up from the previous forecast of 5.6 percent.

“But faster growth this year will come at the cost of the 2023 print, which we have lowered to four percent, from 4.8 percent,” he said.

In a separate report, Capital Economics senior Asia economist Gareth Leather said the Philippines may post a slower economic growth next year.

“We think economic growth will slow from seven percent this year to just five percent in 2023,” he said.

He said Philippine economic growth is likely to slow over the coming quarters as higher inflation and rising interest rates hold back consumption.

Teng of DBS said Philippine economic growth is likely to cool in 2023 after meeting the 6.5 to 7.5 percent growth target set by economic managers through the Development Budget Coordination Committee (DBCC) for this year.

He said pent-up demand would likely fade and high inflation and monetary tightening would bite, with consumer demand easing over the coming quarters.

“Domestic activity would be hurt by inflation, monetary tightening and fading reopening gains,” Teng said.

DBS has raised its inflation forecasts to 5.8 percent for 2022 and to 4.4 percent in 2023, both above the two to four percent target set by the Bangko Sentral ng Pilipinas (BSP).

Teng said the  headline and core inflation figures remain on an uptrend as of the fourth quarter, with headline inflation soaring to a 14-year high of 7.7 percent in October from 6.9 percent in September amid broadening price pressures and second-round effects.

“Philippines’ headline inflation momentum remains elevated historically, even though it is off its peak. ASEAN’s average, in contrast, has started to moderate,” Teng said.

The BSP   has raised key policy rates by 225 basis points and has signaled another 75-basis-point hike on Nov. 17 to match point by point the aggressive rate increase delivered by the US Federal Reserve, to tame inflation and stabilize the peso.

“The BSP is among the most hawkish ASEAN central banks amid above-target inflation, as it aims to anchor inflation expectations. It has racheted up its policy rate hikes to maintain reasonable policy rate differentials with the Fed,” Teng said.

Fitch Solutions Country Risk & Industry Research also upgraded the GDP growth forecast for the Philippines to 7.4 percent from the original target of 6.6 percent for this year after the stronger-than-expected economic performance in the year-to-September period.

“The uptick in growth momentum was largely attributed to the sustained normalization of economic activity,” Fitch Solutions said.

In a commentary titled “Philippine Growth Momentum to Wane in the Coming Quarters,” the research arm of the Fitch Group said that it lowered its GDP growth forecast for next year due to elevated inflation and the BSP tightening cycle.

“In contrast, due to the higher base effects as well as mounting growth headwinds stemming from a quicker pace of monetary tightening and slowing global growth environment, we have lowered our 2023 growth forecast to 5.9 percent, from 6.2 percent previously,” Fitch Solutions said.

According to Fitch Solutions, pent up demand is expected to wane as elevated inflation would continue to erode household purchasing power and weigh on private consumption.

“Already, we are seeing signs of inventory build-up in the Philippines, which contributed 2.3 percentage points to headline growth in the third quarter,” it said.

Likewise, it added that above-target inflation and tightening external credit conditions would prompt the Philippine central bank to continue its aggressive rate hiking cycle, which would in turn weigh on investment prospects, and, to an extent household spending.

Fitch Solutions also cited that the outlook for the global economy has softened considerably and would further dampen external demand for Philippine exports.

“We expect growth to slow over the coming quarters,” it said.

Moody’s Analytics associate economist Sonia Zhu said   the Philippines is on track for a GDP growth of more than seven percent  this year.

“Despite inflation accelerating through the September quarter, the latest reading shows that the economy weathered this headwind quite well,” Zhu said in a commentary.

The research arm of the Moody’s Group said that high inflation would overshadow the economy into early 2023.

“The rest of 2022 and early 2023 will be bumpier as the country battles with inflation, rockier global condition and rising interest rates,” Zhu said.

Moody’s Analytics sees the central bank raising interest rates by 75 basis points this month, followed by another rate hike next month.

“Higher inflation will squeeze household spending and business investment,” Zhu said.

Despite the stronger-than-expected growth in the third quarter, ANZ Research chief economist Sanjay Mathur and economist Debalika Sarkar said that the business cycle has yet to meaningfully respond to the monetary tightening cycle.

ANZ said that the impressive pace of economic activity is now without side effects such as the current strength of domestic demand does little to assuage the current account position and that inflation would be slow to revert to the two to four percent target.

Furthermore, it warned that the ongoing monetary tightening cycle may need to be deeper than currently anticipated.

Socioeconomic Planning Secretary Arsenio Balisacan said consumption was among the main drivers of growth, even as consumer prices have risen.

Household consumption grew by eight percent year-on-year in the third quarter, faster than the 7.1 percent in the same period last year, but slower than the 8.6 percent in the second quarter.

“The  third quarter  revival in consumption in the middle of the ongoing surge in consumer price index inflation was made possible by a significant run-up in borrowing and a redirection of potential savings, both of which are unsustainable,” Chanco said.

He also said fewer households have been able to set aside savings in the third quarter, reflecting the squeeze in inflation.

Even before prices and interest rates started rising this year, he said savings have already suffered a cumulative eight percent decline in 2020 to 2021.

BSP Governor Felipe Medalla said earlier, the central bank will match the recent rate hike by the US Federal Reserve by raising rates by 75 basis points at its Nov.17 meeting.

Leather said exports are also likely to suffer as global growth continues to weaken.

“A shift in global consumption patterns from goods back to services will also weigh on the sector,” he said.

While the government is pushing for infrastructure development, he also said fiscal consolidation would be needed to stop debt from continuing to rise.

The government is aiming for economic growth to reach 6.5 to 7.5 percent this year.

Growth in the nine months to September averaged 7.7 percent.

For next year, the government has a set a 6.5 to eight percent growth target.