Restrained consumption seen holding back Philippine growth this year

ECONOMIC GROWTH is expected to moderate this year with inflation serving as a dampener on consumption, Standard Chartered Bank said on Tuesday.

“There are a few headwinds on consumption front. Elevated inflation may continue to dampen (growth). Even though household consumption has been a key driver of growth, the contribution from food and beverages is lower because of higher prices,” Standard Chartered economist for Asia Jonathan Koh said in a virtual briefing on Tuesday.

The bank expects gross domestic product (GDP) to grow 5.3% this year, which it calls a “moderation from last year’s stellar recovery.” This forecast is lower than the 6-7% official target set by economic managers.

The economy grew 7.6% last year, the highest rate since 1976 and among the strongest in Asia.

“Consumer sentiment is weakening with high inflation and interest rates in the Philippines,” he added.

Standard Chartered sees inflation averaging 4.8% this year, above the central bank’s 4.5% projection.

Headline inflation accelerated to a 14-year high of 8.1% in December, bringing the full-year average to 5.8%, which was also a 14-year record.

“We know inflation is running hot in the Philippines. It’s not just elevated, it’s also broad based. We are expecting it to moderate due to base effects. We see subsequent easing in terms of monthon-month inflation,” he said.

The bank said it expects the Bangko Sentral ng Pilipinas (BSP) to hike rates by another 50 basis points (bps) in the first quarter.

“We expect the BSP to (bring) inflation to target by hiking another 50 bps in the first quarter. We expect cuts to take place in the fourth quarter,” he added.

Mr. Koh said that the boost in consumer spending last year was due to the reopening of the economy and will likely normalize this year.

Household consumption surged 8.3% last year from 4.2% in 2021, mainly driven by restaurant and hotel spending.

Mr. Koh said that growth this year will also be affected by a slowdown remittances amid the anticipated US recession.

“In terms of remittances, it’s not going to be as supportive as it was in 2022. Since then, dollar-peso has come off a bit. If we look at the remittances breakdown, the US accounts for more than 40% of remittances,” he added.

Mr. Koh said that high interest rates could also weigh on investment.

“On investments, activity may plateau in 2023. Business confidence has been falling and public sector support is less forthcoming this year… loans to business could start to moderate. Foreign direct investment was strong in 2022 but with high interest rates, that could affect inflows,” he added.

“There’s a lot of room for catch up. The one that has not recovered is investment. But if we look at recent indicators like capital goods, imports, it’s not reflecting any recovery,” he added.

He also noted that the electronics, the country’s top export, will likely experience a slowdown.

“We saw how the momentum for electronics exports faltered. It’s our view that the electronics sector is not going to be supportive of exports in 2023 due to the sector entering a downcycle,” he added.

However, he noted that tourism will be a bright spot amid the reopening of the economy.

“Services exports should help support growth in 2023. We saw some of that in the third and fourth quarters. This year, with (countries) continuing to loosen restrictions and with China reopening, that will help with travel,” he added.

Separately, First Metro Investment Corp. (FMIC) and the University of Asia and the Pacific (UA&P) said that the economy could expand by around 6% this year, riding on the momentum seen in 2022, with inflation expected to ease.

“Robust employment, construction, manufacturing, exports and OFW data propelled GDP to grow by 7.2% in the fourth quarter last year. The year ended 7.6% higher than 2021, also far above analysts’ projections. The momentum should spill over into 2023 through the multiplier effect,” FMIC and UA&P said in its market call on Tuesday.

“To be sure, GDP growth in 2023 may not match that of 2022. Nonetheless, the positive signals mentioned above should keep it still at a fast pace of 6%,” it added.

The report said that the economy will weather the anticipated global recession, citing consumption, employment, exports, and manufacturing as growth drivers.

“While some fret about an economic slowdown due to the global economy heading towards a recession, we recall that Philippine growth in the past decade had relied more on expanding domestic demand,” it added.