Q2 GDP growth likely slowed to 5.6%

Philippine economic growth likely slowed to 5.6% in the second quarter, as still-elevated inflation continues to dampen consumer spending, First Metro Investment Corp. (FMIC) and the University of Asia and the Pacific (UA&P) said.

“I do expect a slowdown in the second quarter to 5.6%,” Victor A. Abola, an economist at UA&P, said at a virtual briefing on Wednesday. “It’s really the carryover of inflation to the second quarter, even though it’s lower, people are still a bit more reluctant.”

The 5.6% gross domestic product (GDP) growth projection would be slower than the 7.5% in the second quarter of 2022. It would also be weaker than the first quarter print of 6.4%, which was the slowest in two years.

FMIC and UA&P gave a 6.1% full-year GDP growth forecast for 2023, which is at the low end of the government’s 6-7% target.

Mr. Abola said he expects the economy to bounce back in the second half as inflation is seen to settle within the central bank’s 2-4% by the fourth quarter.

“We’re already seeing a turnaround in inflation rate, that’s why the second-half (growth) will be much more robust compared to what we expect to see in the second quarter,” Mr. Abola said.

Inflation decelerated for the fifth straight month to 5.4% in June. This was the slowest in 14 months or since the 4.9% clip in April last year. Year-to-date inflation settled at 7.2%

“Actually, inflation will touch 3% and even go below 3% year on year by the fourth quarter. That means, interest rates will have to go down because you cannot have a very big gap between your nominal yield and the inflation rate.”

Mr. Abola sees inflation averaging 5.5% this year, a tad higher than the central bank’s 5.4% forecast.

FMIC Executive Vice-President Daniel D. Camacho said the Bangko Sentral ng Pilipinas (BSP) will likely keep policy rates steady at 6.25% for the rest of the year, before it starts its policy easing in 2024.

The Monetary Board kept its key rate at 6.25% for the second straight meeting last month. This was after it raised borrowing costs by 425 basis points (bps) from May 2022.

“We seem to be nearing the end of the tightening cycle. That’s going to help shore up market sentiment,” FMIC Head of Research Cristina S. Ulang said at the same briefing.

Inflation and interest rates are still higher in the Philippines compared with its regional peers, she noted, adding there is a “long way to go” before inflation falls below the BSP’s 2-4% target.

“That is why our recommendation [for market players] is to position while the sentiment is still negative. Eventually there is going to be a turning point, inflation is going to return to 2-4%. The BSP may no longer consider following the Fed hiking some more because the argument for hiking is no longer there,” she said.

Ms. Ulang added that policy easing may start by the first quarter next year.

INFRASTRUCTURE RECOVERY
For 2024, the Philippine economy may grow by 6.5%, mainly driven by the recovery in infrastructure, Mr. Abola said.

He noted that infrastructure spending should focus on addressing the housing backlog. The government is planning to spend 5-6% of GDP on infrastructure until 2028.

President Ferdinand R. Marcos, Jr. earlier issued a directive to implement the “Pambansang Pabahay Para sa Pilipino” program.

“It’s a huge program to address the six-million-unit housing backlog and they’re targeting one million housing units per year compared to the 200,000-300,000 that we produce every year. So, there’s going to be a lot of employment,” Mr. Abola said.

The program focuses on building affordable and accessible homes in selected areas, with the goal of clearing the housing backlog before Mr. Marcos steps down by mid-2028.

Mr. Abola also said that the debt-to-GDP ratio is on track to fall to 60.2% in 2023 and 59.6% in 2024.

As of end-March, the government’s debt-to-GDP ratio stood at 61%, slightly higher than the 60.9% seen as of end-December. This was also still above the 60% threshold considered manageable by multilateral lenders for developing economies.

He also expects gross international reserves to end the year at $102 billion, slightly higher than the BSP’s USD 100-billion projection.

The dollar buffers stood at USD 99.8 billion as of end-June. — Keisha B. Ta-asan