PH growth likely to moderate next year

Philippine economic growth is expected to moderate in the coming months amid weakening consumption and gross capital formation, ING Bank N.V. Manila said.

In an article on its website dated Dec. 13, ING said it expects Philippine gross domestic product (GDP) growth to settle at 5.3% this year and further ease to 4.5% by 2024.

“Philippine GDP growth surprised on the upside in the third quarter and has, for the most part, outperformed our expectations. Despite this, we believe challenges to the outlook remain with household spending appearing stretched and fiscal spending possibly reaching its limits,” ING Senior Economist Nicholas Antonio T. Mapa said.

The economy grew by 5.9% in the third quarter, bringing the nine-month average to 5.5%. This is still below the government’s 6-7% target range this year.

For 2024, the government is targeting 6.5-8% growth.

Mr. Mapa said that GDP growth may not be robust and could moderate next year as private consumption, which accounts for about three-fourths of GDP, is growing at a slower pace.

“We had initially expected spending on basic food items to recover as inflation moderated by mid-2023. However, spending on these items has remained flat. This trend could be explained by the unexpectedly strong household spending at restaurants, with households substituting having meals at home for dining out,” ING said.

Household consumption grew by 5% in the third quarter, the weakest pace in two years. This was also slower than 8% a year ago and 5.5% in the previous quarter.   

Mr. Mapa also said that slower wage growth may mean consumers will cut back on spending.

“With wage adjustments carried out generally once a year, a sharp increase in wages is not likely to take place until mid-2024 at the earliest. The outlook for only modest wage growth suggests that household spending is not likely to rebound sharply next year even if inflation remains within target,” he said.

Gross capital formation, or the investment component of the economy, will likely continue to decline.

“We will likely need to see a sharp rebound in imports of both capital machinery and raw materials before we can expect a recovery for capital formation and given the restrictive monetary policy stance, we could see capital formation staying in the red for at least the first half of next year,” Mr. Mapa said.

Gross capital formation slipped by 1.6% in the third quarter, ending nine straight quarters of growth. This was also a reversal of the 18.2% expansion a year ago and 0.3% in the second quarter.

The boost in government expenditure during the third quarter may be difficult to sustain.

“As noted earlier, government spending was one of the drivers of third-quarter GDP. However, we remain skeptical that it will be a reliable source of growth to power momentum in the coming quarters. The main reason for this is the limited space for fiscal authorities to increase spending due to elevated debt levels,” Mr. Mapa added.

Government spending rose by 6.7% in the July-September period, a turnaround from the 7.1% contraction in the second quarter. Government agencies were ordered to draft catch-up plans for spending amid low budget utilization in the first half.

Mr. Mapa emphasized that ramping up government spending will be key to strong growth in 2024.

“The wild card for growth next year, however, will be government spending, which is expected to be capped by elevated debt levels. We believe that GDP growth can outperform our initial base case scenario but only if government spending is able to expand by double digits for all of 2024,” he added.

Net exports growth is also unlikely to continue.

“Net exports, which have positively contributed to growth for two straight quarters, are likely to revert to a negative contribution to GDP as early as the fourth quarter. With exports likely to struggle next year, we expect the overall trade deficit to remain substantial enough to keep the current account balance in deficit territory and ultimately weigh on overall GDP growth momentum for next year,” Mr. Mapa said.

“We could see upside to this outlook should inflation slow sharply, which could free up some purchasing power for households while an eventual easing of monetary policy by the second half of 2024 should help bolster investment activity,” he added.

INFLATION
Meanwhile, ING expects Philippine inflation to average 4.1% next year. This is still above the central bank’s 2-4% target and its 3.7% baseline forecast.

“We forecast inflation to average 4.1% year on year next year with much of the price pressures driven by supply-side factors such as drought, imported energy price adjustments and a shortage of fish,” Mr. Mapa said.

He said demand-side pressures will be “relatively muted” as consumption is expected to moderate and government spending “will be unable to ramp up spending in a manner that could be inflationary.”

The BSP will also likely continue its tightening path next year, ING said.

“Despite price pressures emanating mainly from the supply side, we believe (BSP Governor Eli M. Remolona, Jr.) will not hesitate to hike rates should inflation indeed flare up next year,” Mr. Mapa said.

The BSP on Thursday kept rates steady at a 16-year high 6.5% for a second straight meeting. From May 2022 to October, the central bank raised borrowing costs by a total of 450 basis points (bps).

Rate cuts are also more likely off the table for next year, ING said. “Thus, we expect the BSP to tighten monetary policy for most of 2024 with only a slim chance for a rate cut towards the end of the year should inflation cool and if global central banks begin to cut rates by midyear,” he added. — Luisa Maria Jacinta C. Jocson