The Asian Development Bank (ADB) cut its gross domestic product (GDP) growth forecast for the Philippines this year, as elevated inflation dampens consumer spending.
In its latest Development Outlook report, the ADB trimmed its GDP growth outlook to 5.7% this year from the 6% projection it gave in April.
If realized, this would be below the government’s 6-7% target for this year, and slower than the 7.6% GDP expansion in 2022.
“We have downgraded our (Philippine growth) forecast for this year mainly due to the weakening in domestic demand,” ADB Senior Regional Cooperation Officer for Southeast Asia Dulce Zara said in a webinar discussing the report on Wednesday.
She noted last year’s economic performance reflected the reopening of the economy, strong pent-up demand and election-related spending.
“Spending, investments were also high (last year). This year, they have gone down. Another factor is the decline in exports. That’s the reason for the downgrade,” she said.
The Philippine economy expanded by 4.3% in April to June, the slowest growth in over two years, amid weak household consumption and a contraction in government spending.
The ADB’s 2023 growth forecast for the Philippines is still the second fastest among Southeast Asian economies, after Vietnam (5.8%) and ahead of Cambodia (5.3%), Indonesia (5%) and Malaysia (4.5%).
This is also higher than the 4.6% GDP growth projection for Southeast Asia, which was slightly lower than the previous forecast of 4.7%.
“The Philippines’ growth story remains strong despite an expected moderation in 2023. Public investment and private spending fueled by low unemployment rate, sustained increase in remittances from Filipinos overseas, and buoyant services including tourism will support growth,” ADB Philippines Country Director Pavit Ramachandran said in a statement.
For 2024, the ADB expects the Philippines to now be the fastest-growing economy in Southeast Asia with a 6.2% GDP growth projection. This after the ADB downgraded its growth forecast for Vietnam to 6% from 6.8% previously.
“Private consumption and investment will continue to underpin growth. A moderation in inflationary pressures next year bodes well for domestic demand,” the multilateral lender said.
Public expenditure and infrastructure spending are expected to pick up in 2024.
“Moving forward, prospects remain positive for the Philippines. We are looking at investments from the government given its pipeline of infrastructure projects and as well as continued consumer spending, which is the main driver of growth for the Philippines,” Ms. Zara said.
The ADB cited several risks to the Philippine growth outlook such as the expected slowdown in major economies, rising geopolitical tensions, and elevated global commodity prices.
“An intensified and prolonged El Niño, other severe weather disturbances, and a continuation of the Russian invasion of Ukraine could elevate inflationary pressures,” it added.
At the same time, ADB maintained its inflation outlook at 6.2% this year and 4% next year, which are both at the higher end of the Bangko Sentral ng Pilipinas’ (BSP) 2-4% annual target range.
Both forecasts are above the BSP’s average inflation projections of 5.6% for this year, and 3.3% for 2024.
At 6.2%, Philippine inflation is projected to be the third-fastest in Southeast Asia this year, following Laos (28%) and Myanmar (14%).
In 2024, the Philippines is still expected to see the third-fastest inflation, after Cambodia and Vietnam.
“Inflation is expected to soften, though the onset of El Niño and elevated global commodity prices may slow the pace of deceleration,” the ADB said.
The multilateral institution said the El Niño weather phenomenon will likely hurt the upcoming harvest, particularly in Southeast Asia.
“This could dent food security and raise inflation in net rice-importing countries, such as Bangladesh, Bhutan, Maldives, Nepal, and the Philippines,” it said.
Ms. Zara said that agriculture production in countries like the Philippines, Indonesia, Myanmar and Thailand will likely be the most impacted by El Niño-induced dry spells and droughts.
“Although inflation has moderated in the first seven months of the year, food inflation remains elevated, above 5% for Laos, the Philippines, Singapore and Malaysia. Reduced agri output both domestic and globally will be harmful for these economies,” she added.
Meanwhile, second-round effects stemming from higher transport fares and wage adjustments may also impact Philippine inflation this year.
“The government is considering extending the period for the reduced tariffs for some food items including rice which are due to expire by December 2023, to keep inflation contained,” the ADB said.
As core inflation eases, the ADB noted the BSP would likely keep policy rates steady before considering cutting them in 2024.
The BSP hiked the key policy rate by 425 basis points (bps) to 6.25% from May 2022 to March 2023.
The Monetary Board will likely hold interest rates steady for a fourth straight meeting on Thursday, as expected by 14 of 17 analysts in a BusinessWorld poll last week.
Meanwhile, economic growth in developing Asia this year will be slightly lower than previously expected as the weakness in China’s property sector and El Niño-related risks cloud regional prospects, the ADB said.
Updating its regional economic outlook, the ADB trimmed its 2023 growth forecast for developing Asia to 4.7% from 4.8% projected in July.
But the growth forecast for next year for the grouping, which consists of 46 economies in the Asia-Pacific and excludes Japan, Australia and New Zealand, was revised slightly upwards to 4.8% from 4.7% previously.
“We see resilient growth in the region really based on pretty strong domestic consumption and investment, and despite reduced external demand, which is a dampener on export-driven growth,” Mr. Park said.
The ADB tempered its growth forecasts for East Asia, South Asia, and Southeast Asia this year, with China and India expected to grow 4.9% and 6.3%, respectively, slightly lower than the July growth projections of 5% and 6.4%.
China’s property crisis “poses a downside risk and could hold back regional growth,” the ADB said in its report.
The Manila-based lender maintained its 2024 growth forecasts for China and India at 4.5% and 6.7% respectively.
While growth has so far been robust and inflation pressures are receding in developing Asia, Mr. Park said governments need to be vigilant against the many challenges the region faces, including food security.
Inflation in developing Asia is forecast to ease to 3.6% this year from 4.4% last year, and continue to slow to 3.5% in 2024, giving central banks policy space, but the ADB said interest rate hiking and easing cycles will vary going forward. — Luisa Maria Jacinta C. Jocson with Reuters