UN says strong domestic demand to support Philippine growth this year

STRONG DOMESTIC DEMAND may help support Philippine economic growth this year despite a potential global recession, according to the United Nations (UN).

“There’s still a fairly good outlook for the Philippines as a whole. What supports the Philippines’ performance is still a very strong domestic economy which allows growth to be supported from that angle,” UN Economic and Social Commission for Asia and the Pacific (UNESCAP) Economic Affairs Officer Shuvojit Banerjee said during a virtual briefing on the UN’s “World Economic Situation and Prospects 2023” report on Thursday.

In its report, the UN forecasts Philippine gross domestic product (GDP) expanding by 5% this year, slower than the 7.7% forecast it gave in January 2022.

This forecast is below the government’s 6-7% target for the year.

UNESCAP also projects Philippine GDP to expand by 6.1% in 2024, also below the government’s 6.5-8% target.

In 2022, the Philippine economy grew by 7.6%, the fastest in 46 years and among the strongest in Asia.

“Even in a climate of strong external pressure, which is in common with the rest of the developing world, what is supporting the Philippine economy has been strong domestic demand and supportive government policy and that is likely to be what will sustain the positive growth outlook for the country going forward,” Mr. Banerjee said.

The UN expects the global economy to grow by 1.9% this year, from an estimated 3% in 2022, amid high inflation, aggressive monetary tightening and increased uncertainties. It said many countries face risks of recession this year.

“There’s been a sharp deterioration of global growth prospects. What we see is a broad-based downturn in 2023 except for China. The outlook remains highly uncertain,” Mr. Banerjee said.

The UN lowered its growth projection for East Asia to 4.4% in 2023 from its previous estimate of 5.4%, “mainly reflecting the modest recovery of growth in China.”

“Economic recovery in East Asia remains fragile, although average growth is stronger than in other regions,” the UN said.

He added that developing countries like the Philippines would likely see “no improvement” in 2023.

“Developing countries in totality have actually survived the crisis in terms of the basic growth numbers, somewhat better than high-income countries. That’s not to say there’s never been a large impact on developing countries, since they had decent growth numbers compared to the developing world. The downgrade in their numbers still remains; they are in a positive growth phase, but still lower than in the past,” Mr. Banerjee said.

He said the outlook for East Asia is “not so hopeful,” citing the impact of the higher cost of living, debt pressures and weakening export demand.

“This coincides with a tightening of global financial conditions, and countries adopting contractionary monetary and fiscal policies to curb inflationary pressures,” according to the report.

While inflation is seen to peak this year, it will still remain a challenge for developing economies, Mr. Banerjee said.

“These have impacted the purchasing power of low-income households, who spend a great portion of income on food and energy. This rise in cost of living will push many of the poor to poverty and amplify concerns on food security and malnutrition,” he added.

The UN forecasts Philippine inflation to average 4.3% this year, higher than its initial 3.4% projection. It also sees inflation easing to 3.2% in 2024.

Philippine headline inflation averaged at 5.6% last year, a 14-year high. This year, inflation is seen to average 4.5%.

“Depreciating currencies mean that imports in the region are more expensive, which is another spur to inflation. On top of this, many countries witnessed weather related events which added to upward price pressures,” Mr. Banerjee said.

Developing countries are facing significant risks due to rising interest rates and global tightening conditions, he said.

“In the developing world, the key impact is on debt vulnerability. As we know, rising interest rates make the cost of debt in developing countries higher and make it harder for them to have debt finance growth and roll over existing debt,” he added.

The UN said in the report that governments should strengthen their debt sustainability measures.

“Several governments are gaining additional room to maneuver by gradually discontinuing pandemic-related emergency measures. This effect is particularly relevant for middle-income countries, for example, Brazil, Malaysia, Mexico, the Philippines and Turkey,” it added.

The UN recommended revisiting rigid inflation targets for policy flexibility and implementing fiscal consolidation measures.

“Governments will need to reallocate and reprioritize public expenditures to support vulnerable groups through direct policy interventions, it said. “This will require strengthening social protection systems and ensuring continued support through targeted and temporary subsidies, cash transfers and discounts on utility bills, which can be complemented with reductions in consumption taxes or custom duties.”

It also said governments should target private investment in critical sectors, improve tax collection and get support from international sources to solve debt stress. —