Weak economic growth to persist in near term

Philippine economic growth is seen to remain subdued in the near term amid slow fiscal consolidation and weakening remittances, Capital Economics said.

“GDP (gross domestic product) growth in the Philippines slowed again in the second quarter of the year, and we expect the economy to remain weak over the coming quarters,” Capital Economics Senior Asia Economist Gareth Leather and Economist Placement Student Harry Chambers said in a report.

Capital Economics expects GDP to grow by 5.1% this year and 5.5% in 2025, which would both miss the government’s 6-7% and 6.5-7.5% targets, respectively.

The Philippine economy grew by 6.3% in the April-to-June period, the fastest in five quarters.

In order to meet the lower end of the government’s target, the economy would need to grow by at least 6% in the second half.

“Tighter fiscal policy and weakening remittances will weigh on economic growth in the Philippines,” it added.

Latest data from the central bank showed that cash remittances rose by 2.9% to USD 19.332 billion in the first seven months. The BSP expects remittances to grow by 3% this year.

“Fiscal policy is also likely to hold back growth. The government is aiming to reduce government debt, which shot up during the pandemic, to more sustainable levels,” Capital Economics said.

Capital Economics also cited other risks to its growth outlook, including the tensions between China and the Philippines.

“The worsening relationship between the Philippines and China poses a downside risk to the outlook. However, the fact that the Philippines is not closely integrated into China’s economy means the fallout should be limited.”

For 2026, Capital Economics sees Philippine growth to average 6.5%, which is at the low-end of the government’s 6.5-8% target.

Meanwhile, S&P Global Ratings in a separate report said it “nudged down” the Philippines’ growth forecast.

It trimmed its GDP projection for the Philippines to 5.7% this year from 5.8% previously.

“Southeast Asian growth has remained generally solid, benefiting from the export recovery and robust domestic demand,” S&P Global Ratings Asia-Pacific Chief Economist Louis Kuijs and Asia-Pacific Senior Economist Vishrut Rana said.

S&P’s growth forecast for the Philippines this year makes it the third-fastest economy in the Asia-Pacific region, after India (6.8%) and Vietnam (6.2%).

However, it raised the Philippines’ growth forecast for 2025 to 6.2% from 6.1% earlier. This still places it as the country with the third-fastest projected growth, after India (6.9%) and Vietnam (6.8%).

“Asia-Pacific growth remains largely intact, driven by a continued export recovery and, in most emerging markets (EMs), solid domestic demand,” it said.

The credit rater now also sees Philippine growth averaging 6.4% in 2026 and 6.5% in 2027.

LOWER INFLATION

Meanwhile, Capital Economics noted that easing inflation and lower interest rates should give a boost to domestic demand.

“We expect inflation to remain subdued over the coming months, helped by a combination of weak growth, beneficial base effects and government efforts to boost the supply of agricultural goods,” Capital Economics said, as it sees inflation settling at 3.3% this year.

Meanwhile, S&P Global expects inflation to average 3.4%, in line with the central bank’s own projection.

Capital Economics also expects the Bangko Sentral ng Pilipinas (BSP) to further reduce interest rates.

“With economic growth set to struggle and inflation likely to stay subdued, we expect further rate cuts by the central bank over the coming months,” it added.

The Monetary Board delivered a 25-basis-point (bp) rate cut last month, its first time reducing rates in nearly four years. There could be another 25-bp cut in the fourth quarter, BSP Governor Eli M. Remolona, Jr. earlier said.

Capital Economics forecasts the BSP to cut by 75 bps this year and end the policy rate at 5.75%. It also sees 100 bps worth of cuts next year to bring the key rate to 4.75%.

Meanwhile, S&P Global expects the benchmark rate to end at 5.5% this year and 4.25% in 2025.

“Regional central banks have nevertheless generally refrained from lowering policy rates. The Philippines, New Zealand, and Indonesia have been exceptions; rate setters there have recently agreed on cuts of 25 bps,” S&P Global added.

RRR

Meanwhile, HSBC Global Research said that the recent reserve requirement ratio (RRR) cut will not impact the BSP’s policy easing cycle.

“Though the RRR cut does increase the funding flexibility of banks (which may be understood as a form of easing), we don’t think the RRR cut significantly alters the monetary policy outlook, nor does it tilt the chances of an October rate cut,” HSBC economist for ASEAN (Association of Southeast Asian Nations) Aris D. Dacanay said in a report.

“We don’t think this is a change in the BSP’s monetary stance since the liquidity injected can be re-absorbed by the BSP through its bill issuances.”

HSBC expects the RRR cut to inject PHP 450 billion into the economy initially.

Starting Oct. 25, the BSP will reduce the RRR for banks and nonbank financial institutions with quasi-banking functions by 250 bps to 7% from 9.5%.

Mr. Dacanay noted that the BSP’s recent signals show they are not in a rush to loosen monetary settings.

“This has also been our long-held view. But with the Fed cutting by 50 bps (last week), we think the risk of the BSP cutting by 50 bps in 4Q 2024 also increased,” he said.

“What matters still for monetary policy is inflation and growth. We continue to expect the BSP to follow a data-dependent approach. With risks to inflation tilted to the upside for September due to Typhoon Yagi, we expect the BSP to keep its easing cycle at a gradual pace, only cutting by 25 bps in December.” – Luisa Maria Jacinta C. Jocson, Reporter