Recovery in H2 doubtful after PH recession shock

FITCH Solutions downgraded on Friday its Philippine economic growth forecast for this year as recovery in the second half is “now highly unlikely” after the country sank into a recession.

Philippine This comes Islands as the Bank ( BPI) of also the trimmed its growth outlook and government officials are assuring the public that the Duterte administration is doing all it can to revive the economy.

In a report, the Fitch Group unit said it now projected domestic output to contract by 9.1 percent this year from its earlier 2.0-percent forecast and could even shrink by as much as 10.8 percent in a worst-case scenario.

“The H220 ( second half of 2020) recovery we had expected is now unlikely and, in our base case scenario, the economy [would] gradually resume activity by yearend, although with domestic activity considerably weaker than previously assumed,” Fitch Solutions said.

Its revised projection comes a day after the Philippine Statistics Authority said the economy plunged into a technical recession after contracting by a record 16.5 percent in the second quarter from the revised 0.7 percent in the first. It blamed the prolonged community quarantines imposed to control the spread of the coronavirus disease 2019 (Covid-19) in the country for the April-to-June data.

The economy will experience a “painful recession” this year as it struggles to manage the health crisis, according to Fitch Solutions.

“With another surge in Covid-19 cases in Q320 (third quarter), the recovery in economic activity we had expected in H220 now looks highly unlikely. Indeed, our [earlier] forecast of -2.0 percent factored in a government-backed, investment-led surge in activity in the second half of the year,” it said.

“However, with parts of the

economy being put back [under] lockdown and fiscal expenditure expected to be directed to social welfare and loan-guarantee programs through H220, the economy will face a delayed recovery,” it added.

According to Fitch Solutions, recovery next year would be softer and is forecast to settle at 6.2 percent, lower than the earlier 6.5 percent, as the pandemic gravely affected household consumption.

“We expect higher household indebtedness, unemployment and damaged consumer confidence to result in an uneven recovery in domestic consumption. As lockdown measures are eased gradually over the coming quarters, retail and recreation activity will pick up,” it said.

It noted, however, that the subdued employment outlook, unlikely recovery of the tourism sector and drop in remittance

flows would weigh on household incomes.

In a separate report, BPI lead economist Emilio Neri Jr. said the Ayala-led banking giant now projected the country’s gross domestic product to shrink by 8 percent, instead of the earlier 5.2 percent.

According to him, all subcomponents on the spending side of the economy are likely to drop sharply, except for net exports and government outlays, while all production sectors are also likely to see the “worst full-year” contraction since the 1980s.

In terms of market implications, Neri said local bond yields might remain low in the near term on the back of the monetary support extended by the Bangko Sentral ng Pilipinas.

But risks related to inflation and the exchange rate remain elevated, he warned.

“Supply disruptions have kept food prices elevated and could be vulnerable to a surge in transport costs,” the economist said. “Furthermore, a substantial decline in remittances may challenge the stability of the exchange rate.”

BPI forecasts the Philippine peso- US dollar exchange rate to settle at P50.6 versus the greenback in 2020 on the contraction in imports and weakened dollar demand.

Despite Fitch Solutions and BPI’s lowered projections, a few Cabinet officials assured the public that the government was ramping up its efforts to contain the coronavirus’ spread and revive the economy.

In a briefing, Acting Socioeconomic Planning Secretary Karl Kendrick Chua said while the reimposition of a modified enhanced community quarantine (MECQ) on Metro Manila and four other provinces from August 4 to 18 would affect recovery, this was necessary to strengthen the country’s healthcare system.

And Trade Secretary Ramon Lopez said it was important to resume the safe and gradual reopening of the economy moving forward, adding that “we must pursue strategic reforms [that] we have yet to do.”