Resilient consumption seen to drive growth

THE PHILIPPINE ECONOMY is expected to expand by 5.8% this year as consumer spending remains resilient, ANZ Research said.

In a note on Thursday, ANZ Research said it raised its gross domestic product (GDP) forecast for 2023 “because the strength in private consumption will be partially offset by weaker fiscal spending and global demand.”

ANZ Research’s 5.8% GDP growth projection is higher than its previous estimate of 5%, but still below the government’s 6-7% full-year target.

“The improved outlook for private consumption growth raises the bar for Philippine growth in 2023, considering that it accounts for around 73% of the overall GDP,” it said.

Private consumption jumped by 8.3% year on year in 2022, helping fuel GDP growth of 7.6%.

In the fourth quarter of 2022, domestic consumption rose by 7%, slower than 8% in the third quarter and 7.5% a year earlier. While private consumption growth eased in the last three quarters, ANZ Research said this was still faster than the average run-rate of 6.2% between 2016 and 2019.

“Our analysis shows that private consumption is still hovering below its pre-pandemic trend, with further room for expansion. The underlying drivers of private consumption can likely delay the impact of rising price pressures and even aggressive monetary policy tightening by a few quarters,” it said.

Inflation quickened to a 14-year high of 8.7% in January, from 8.1% in December. The Bangko Sentral ng Pilipinas (BSP) sees inflation averaging 6.1% this year, faster than the 5.8% average in 2022.

Since May 2022, the BSP has raised borrowing costs by 400 basis points (bps), bringing the benchmark rate to a near 16-year high of 6%.

However, higher economic growth may reinforce risks to inflation, prompting ANZ Research to hike its forecast to 5.9% this year from 5.1% previously.

“A stronger growth-inflation mix, however, could prolong the monetary policy tightening cycle more than currently anticipated,” it said.

ANZ Research said it expects two 25-bp hikes at the BSP’s next two meetings in March and May.

“However, any surprise in the inflation data for February could prompt a higher hike of 50 bps by the central bank at their next policy meeting.”

Earlier this week, the BSP said inflation likely settled within the 8.5% to 9.3% range in February.

If realized, February would mark the 11^th straight month that inflation would exceed the BSP’s 2-4% target range. The upper end of the forecast or 9.3% would be the fastest pace recorded in more than 14 years or since the 9.7% recorded in October 2008.

The Philippine Statistics Authority is scheduled to release the February inflation data on March 7, while the Monetary Board is set to review policy on March 23.

Slowdown to take time

ANZ Research said some consumption indicators showed consumer spending has already weakened, but it expects the actual slowdown to take some time.

For instance, the BSP consumer expectations survey showed the consumer confidence index slipped to 21.7 in the fourth quarter of 2022 from 33.4 in the previous quarter. The survey also showed buying intentions have dropped to multi-year lows. 

“However, it may take a few more quarters before such intentions are actualized, in our view. As long as households’ financial conditions remain healthy, monetary policy transmission will likely be less effective than desired, despite the BSP’s aggressive rate hikes,” ANZ Research said.

It also noted that consumer loan growth remained stable, despite rising interest rates.

“Generous wage hikes in 2022 more than offset the increase in inflation, boosting purchasing power… The increase in household income has enabled consumers to replenish savings without cutting back on consumption,” it said. 

Central bank data showed outstanding loans by big banks rose by 10.4% year on year to PHP 10.71 trillion in January. However, the pace of growth was the slowest in nine months.

Household debt also remained manageable despite strong demand for bank loans.

“According to our estimates, households’ debt-to-GDP ratio likely edged up to 12.1% in the fourth quarter of 2022, from 10.1% in the third quarter. This figure is among the lowest compared with other economies in the region and does not appear to be a source of immediate concern for consumers,” ANZ Research said. 

“In short, Filipino household finances are sufficiently healthy for a step-up in consumption this year.” — Keisha B. Ta-asan