Not bad news for the economy, but a caution

AS expected, inflation for February increased from the previous month to hit 3.4 percent, according to the Philippine Statistical Authority earlier this week, with the rise attributed mainly to higher food prices. Although higher than the comfortable 2.8-percent inflation rate in January, February’s rate was on its own not cause for serious concern; 3.4 percent is safely within the Bangko Sentral ng Pilipinas’ 2- to 4-percent target range, and less than half the inflation rate during the same month last year.

However, there are new indications that global factors will put pressure on prices, and on the economy in general, weakening what has been until now a quite optimistic prognosis for the rest of this year. The factors highlighted are not inevitable bad news for the economy, but should be viewed as a caution against complacency.

In an analysis published last week, the Economist Intelligence Unit (EIU) assessed the impact of the ongoing disruption to shipping in the Red Sea, caused by attacks against ships by the Iran-backed Houthi rebels that control much of Yemen, and as a consequence, the narrow, strategically vital Bab elMandeb Strait between Africa and the Arabian Peninsula.

The attacks, which the Houthis rather unconvincingly claim are aimed at Israel in retaliation for its war in Gaza, have persisted in spite of aggressive efforts by a US-led naval coalition to stop them, with the result being the virtual halt of all shipping traffic through the Red Sea and the Suez Canal.

According to the EIU, container trade between Asia and Europe, and the United States east coast has dropped by 85 percent since the attacks began in earnest in November 2023. The next-best option, sailing around Africa via the Cape of Good Hope, adds two weeks in transit times and tens of thousands of dollars in expenses.

Some Asian countries are affected worse than others, but for everyone, the Philippines included, the disruption has resulted in significant delays and increases in freight costs. Data provided by the EIU indicates that 54 percent of port calls in the Philippines are experiencing delays and dwell times (the amount of time inbound or outbound cargo sits in port before either being released for delivery or loaded onto a ship) for import and export shipments have risen to as much as 8.1 and 5.6 days, respectively.

It is important to note that much of the affected shipping — for example, all of the Philippines’ two-way trade with China — is not at all directly impacted by the Red Sea crisis, it is simply that the disruption has become so severe that it affects everything.

PH food imports at risk

A particular risk for the Philippines is that we import a substantial amount of food, and shipping costs for food shipments have skyrocketed. This may have already been reflected in February’s increased inflation rate, and if so, we can expect further increases in the coming months. We are not as seriously affected as some other Asian countries in this respect, but as a significant proportion of Philippine exports are also food commodities, the problem cuts both ways.

The EIU estimates that for Asian economies, the impact of the Red Sea shipping disruption could result in as much as 0.5 percent slowing of gross domestic product growth rates this year and an additional 0.4 percent or more added to inflation rates. The research firm laments that, “This has increased concern among Asian policymakers and manufacturers regarding economic stability just when the macroeconomic situation had started to normalize.”

Indeed it should increase concerns, because while the outlook for the Philippine economy in 2024 was very good when the year began, the optimism nevertheless recognized there were some existing risks. At the time, it was believed that the Red Sea shipping disruption would be inconsequential, with other risks such as oil prices and the potential impact of El Niño being higher.

However, the shipping disruption appears to be a bigger potential concern than anticipated. It is still not bad news for the Philippines; prospects as of now are still good, and risks still seem manageable, even if they are bigger than first thought. The key is that the risks do, in fact, need to be proactively managed, and we certainly hope that our policymakers are keeping up-to-date with the news and planning ahead.