Economic growth may pick up to 5.7%

Philippine gross domestic product (GDP) may grow by 5.7% this year following the economy’s faster-than-expected expansion in the fourth quarter of 2023, UBS Global Research and Evidence Lab said.

The research firm raised its 2024 Philippine GDP growth forecast from 5.3% previously, Grace Lim, an economist from UBS, said in a note. It also hiked its 2025 projection to 6% from 5.8%.

“This largely reflects carryover effects from the fourth quarter of 2023, rather than a strong bounce in sequential growth momentum through 2024,” Ms. Lim said.

Both forecasts are below the government’s growth targets of 6.5-7.5% for this year and 6.5-8% for 2025.

The Philippine economy grew by 5.6% in the fourth quarter, bringing full-year growth to 5.6% in 2023. This was slower than the 7.6% expansion in 2022 and below the government’s 6-7% goal.

At 5.7%, economic growth this year would be faster than the 2023 pace but is still slower than the pre-pandemic average of 6.6%, Ms. Lim noted.

“On the bright side, we highlight that inflation has been trending down nicely, surprising consensus on the downside for three months in a row,” she said. “Should downside risks to inflation materialize, consumption could surprise on the upside.”

Inflation eased to 2.8% in January from 3.9% in December and 8.7% in the same month a year ago. This was the slowest print since October 2020 and marked the second straight month that inflation settled within the 2-4% target band.

Ms. Lim noted that consumer spending remained robust last year despite inflationary pressures and amid resilient labor market conditions.

In 2023, household spending grew by 5.6%, slower than 8.3% in 2022. Household consumption typically accounts for three-fourths of GDP.

Meanwhile, the unemployment rate dropped to a record low of 4.3% from the 5.4% recorded in 2022.

Ms. Lim added that the decline in government spending seen in the fourth quarter of 2023 was largely in line with expectations. Government spending contracted by 1.8% that quarter, bringing the full-year growth to a flat 0.4%.

“The government budget has the fiscal deficit declining by another one percentage point in 2024, financed by revenue broadening (including increasing tax efficiency and compliance),” she said.

“In nominal terms, we expect government consumption growth to accelerate modestly in 2024, growing by about 7-8% year on year,” she said.

Meanwhile, inflation may surprise to the downside this year, especially if government interventions to stabilize rising rice prices are successful, Ms. Lim said.

“We forecast inflation to fall further in January to February on base effects, before breaching the 4% upper bound slightly in the second quarter due to base effects,” she said.

UBS sees inflation averaging 3.6% this year, lower than the 3.7% baseline forecast of the central bank.

The Bangko Sentral ng Pilipinas (BSP) is also expected to cut borrowing costs by a total of 100 basis points (bps) this year, broken down into 25-bp rate cuts at each of the Monetary Board’s four meetings in the second half.

If realized, the policy rate would go down to 5.5% by end-2024 from the current level of 6.5%, which is a 16-year high.

The Monetary Board hiked borrowing costs by a cumulative 450 bps from May 2022 to October 2023 before keeping them steady at its last two meetings.

The BSP is widely expected to keep benchmark interest rates unchanged for a third straight review on Thursday, a BusinessWorld poll held last week showed. — Keisha B. Ta-asan