Forecast Update: Faster 2025, 2026 GDP growth follows tough year

The 3rd quarter 2024 gross domestic product (GDP) growth settled lower-than-expected at 5.2% from the revised 6.4% in the previous quarter. The slight pick-up in private consumption and investment was weighed down by the wider trade deficit and the slow expansion in government spending.

At the beginning of the 4th quarter this year, several typhoons ravaged the country and brought widespread flooding, damaging properties and destroying crops in various areas of the country. The onslaught of Typhoon Kristine alone has damaged agricultural crops worth an estimated PHP 6.2 billion, 72% of which is in rice production.

With the recent downside surprise in GDP and the economic impact brought by recent typhoons, we have revised our 2024 full-year average forecast downward to 5.6% from 5.7%. However, as the economy recovers and the effect of lower interest rates continues to kick in at the beginning of next year, we expect faster growth in 2025 and 2026 at 6.2%.

Trump red wave implies higher inflation in the US

With Donald Trump winning the US presidential elections and the Republicans securing control of the lower and the upper houses in Congress, the US may experience higher inflation in 2025 as Republican-proposed policies on tariffs and immigration in the US may lead to higher prices of goods and services in the US.

Given the expectation of higher US inflation, we have revised our year-end target Fed Funds Rate forecast in 2025 to 3.75% (upper bound) from the previous expectation of 3.50%, equivalent to 75 basis points (bps) worth of cuts in 2025.

Meanwhile, as we anticipate the lagged effect of elevated inflation to impact growth in 2026, we expect the Fed to continue easing in 2026 and deliver 75 bps worth of cuts, settling at the terminal rate of 3.00% by end-2026.

BSP Policy Rate: Moving with the US Fed

The dollar strength due to the Trump red wave in the US is causing the weakening of currencies, including the Philippine peso. Given the current pace of depreciation of the peso, a narrower interest rate differential may be detrimental.

As we expect a slower pace of interest rate cuts by the Fed in 2025, we have revised our end-2025 forecast for the Bangko Sentral ng Pilipinas (BSP) target Reverse Repurchase Rate to 5.00%, translating to 75 bps worth of cuts in 2025 and maintaining a 125-bp interest rate differential between the BSP and the Fed. Moreover, we expect the easing cycle to continue until 2026 and settle at a terminal rate of 4.25% by end-2026