Household consumption seen slowing

The Philippine economy may not meet the government’s 6-7% growth target this year, as household consumption is likely to further weaken despite slower inflation, analysts said.

Pantheon Macroeconomics Chief Emerging Asia Economist Miguel Chanco gave a Philippine gross domestic product (GDP) growth forecast of 5.5% for this year, as he expects “much weaker” prints in the second half.

“We’re not at all optimistic about the consumption picture, despite the continued easing in inflation. While this should help at the margins, household spending will face stronger and more fundamental pressures,” he said in an e-mail.

Ateneo de Manila University economics professor Leonardo A. Lanzona said consumer spending likely further slowed in the second quarter as pent-up demand continues to fade.

“I expect growth to further decline in the second quarter and even in the second half of the year. As the base of the GDP has already increased, the effect on the country of the lower restrictions from the pandemic will start to wane,” he said in an e-mail.

In the first quarter, Philippine GDP expanded by 6.4%, slower than the revised 7.1% in the previous quarter, and the 8% in the first quarter of 2022, as elevated inflation and rising interest rates dampened consumer spending.

On a seasonally adjusted quarter-on-quarter basis, GDP growth slowed to 1.1% from the 2% growth in the previous quarter. 

Household final consumption, which contributes around three-fourths to GDP, grew by 6.3% in the January-to-March period. This was slower than the 7% growth in the previous quarter, and 10% a year earlier.

Inflation has been on a downward trend since the peak of 8.7% in January. In June, inflation slowed to 5.4%, bringing the six-month average to 7.2%.

ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said first-quarter growth could have been the peak for the year, as households are now shifting to a “more normal consumption and savings behavior.”

In the previous quarters, he noted growth was driven by “revenge spending.”

“Although there are some hopes for further acceleration in consumption due to slowing inflation, households are likely already facing fatigue from the frenetic pace of spending post lockdowns,” Mr. Mapa said in an e-mail.   

“The economic growth story cannot be driven by consumption alone and unless we see growth broaden to other sectors such as capital formation, we will likely see growth slip below our pre-COVID,” he added.

Mr. Chanco noted that household savings have deteriorated since the pandemic began in 2020, and that household balance sheets are now “increasingly in worse shape.”

“We highly doubt that they will have the willingness and, more importantly, the ability to sustain the strong spending growth seen over the last 18 months or so. Consumers are also more in debt these days, due to the surge in borrowing seen in 2022, and this debt is much more costly to service owing to the BSP’s aggressive tightening of monetary policy,” he said.

In 2022, gross national savings rose by 26.6% to P4.9 trillion, ending two years of annual decline.

Households, including nonprofit institutions serving households, posted negative savings of P787.635 billion last year, bigger than the negative savings of P622.23 billion in 2021.

Tightening
The Philippine economy is also expected to slow due to the lagged impact of the Bangko Sentral ng Pilipinas’ (BSP) aggressive monetary tightening to tame red-hot inflation.

Since May 2022, the BSP has raised borrowing costs by 425 basis points, bringing its key policy rate to a near 16-year high of 6.25%.

“Aggressive tightening has indeed slowed the pace of bank lending, which in turn will cap growth potential. Forward-looking indicators such as imports of capital goods and bank lending show signs of moderating, suggesting a loss of momentum in the growth story,” Mr. Mapa said.

Data from the BSP showed outstanding loans by big banks, net of reverse repurchase placements with the central bank, expanded by 9.4% to P10.9 trillion in May from P9.97 trillion a year ago. This was the slowest credit growth in 15 months or since the 8.9% print in March 2022.

Meanwhile, Mr. Lanzona noted that the services sector may be a bright spot for growth this year.

“One growth prospect is services, especially as the workers have adopted mostly to the digital transformation. However, this remains weak and uncertain,” he said.

In the first quarter, services had the biggest contribution to growth among major industries. It rose by 8.38%, easing from 8.42% in the same quarter of 2022 and 9.8% in the previous quarter.

To ramp up productivity and support economic growth, Mr. Lanzona said that the government should focus on upskilling its workers to prepare them for the challenges of the Fourth Industrial Revolution.”

“While employment has increased, middle-skill jobs have hallowed, causing an employment polarization with a substantial proportion of low-skilled (mostly informal) workers on one end and a small share of highly skilled workers on the other end. This will have a negative effect on the country’s productivity as well as its political stability,” he added. — Luisa Maria Jacinta C. Jocson, Reporter