Decoding the mystery behind consumer spending
Consumer spending is largely driven positively by several macroeconomic variables, which could broadly offset the possible consumer spending contraction caused by high inflation.
Consumer spending, a measure of all our spending on goods and services, is a crucial component of our economy.
It drives our country’s economic growth, comprising around 73-74 percent of the Philippines’ gross domestic product for the past five years. Even at the height of the pandemic, consumer spending was still a big part of GDP, capturing 74-75 percent in 2020.
With all the geopolitical tensions and the subsequent market volatilities happening in the country now, i.e., climbing prices, high inflation expectations, depreciation of the peso, etc., will consumer spending still be robust in the remaining months? Will it be able to sustain our economic growth?
To answer these questions, we first have to know whether these global events actually drive consumer spending, or, maybe at the very least, how correlated they are with consumer behavior.
Factors affecting consumer spending
To do this, we looked into remittances (in US dollars) from overseas Filipino workers (OFWs), the USD/PHP exchange rate, the inflation rate, and inflation expectations (as proxied by the 10-year Philippine treasury bond rates) and analyzed whether their movements could help explain consumers’ spending behavior.
Our results show that all these variables have a statistically significant relationship with consumer spending. That is, they all have correlations or relationships with consumer spending that are not simply caused by chance or luck.
Note, however, that the strength of their effect, or relative importance, on consumer spending vary. Let’s rank them from highest to lowest.
What affects spending the most?
First, the strength of the positive effect of inflation expectations on consumer spending was the biggest. When inflation expectations are high, consumer spending also strengthens in anticipation of future higher prices. People would rather spend now than later.
OFW remittances were second to inflation expectations in terms of having a strong positive link with consumer spending. The higher the US dollar remittances sent by OFWs to their families in the Philippines, the higher their capacity to spend here in the country, and this boosts consumer spending.
Peso depreciation is also positively correlated with consumer spending. It was the third in terms of ranking. The weaker the peso, the higher the OFW remittances would be in peso terms and, thus, the higher the purchasing power.
Fourth in ranking is inflation, and it is negatively related to consumer spending. The higher the inflation, the weaker consumer spending tends to be.
So, although the Philippines is in a high-inflation environment right now, consumer spending is still expected to be strong. The 10-year rates are going up (meaning, inflation is expected to further climb in the next few months), there is an expected seasonal increase in OFW remittances in the fourth quarter, and the local currency continues to weaken.
Again, the effect of these three variables together on consumer spending is expected to more than offset the drag created by current inflation.
The prospect of inflation peaking in the fourth quarter may lead to a slight contraction in consumer spending, and people may be more discriminating in they spend on.
As a whole, however, consumer spending will still grow in the fourth quarter because the other variables will dominate in terms of overall impact, largely offsetting the possible contraction pressure from high inflation.
This will most likely continue to be a major contributor to GDP and sustain economic growth.
ANNA ISABELLE “BEA” LEJANO is a Research & Business Analytics Officer at Metrobank, in charge of the bank’s research on the macroeconomy and the banking industry. She obtained her Bachelor’s degree in Business Economics from the University of the Philippines School of Economics and is currently taking up her Master’s in Economics degree at the Ateneo de Manila University. She cannot function without coffee.