Gov’t spending, domestic demand to drive economy

THE PHILIPPINE ECONOMY may grow above 6% this year and next, fueled by government spending, private consumption and strong external demand, although inflation risks and a potential slowdown in major trading partners like the US and China pose risks to the outlook, the ASEAN+3 Macroeconomic Research Office (AMRO) said on Tuesday.

It added that while the country’s fiscal-monetary policy mix is “appropriate,” it can be tweaked “to support economic growth while rebuilding policy buffers.”

“The Philippine economy is expected to grow by 6.1% in 2024 and 6.3% in 2025, driven by higher government spending, as well as an upturn in external demand, and strengthening domestic demand,” AMRO Principal Economist Runchana Pongsaparn said in a statement following their annual consultation visit to the Philippines from Aug. 27 to Sept. 6.

“Private consumption is anticipated to grow faster for the rest of the year, supported by strong labor market conditions, lower inflation, and robust overseas remittances. With the start of the monetary policy easing cycle, we expect private investment sentiments to improve,” Ms. Pongsaparn said.

If realized, AMRO’s 2024 forecast would be within the government’s 6-7% target, while the 2025 outlook would fall below the 6.5-7.5% goal for that year.

Philippine gross domestic product (GDP) expanded by 6.3% in the second quarter, bringing first-half growth to 6%. To meet the lower end of the government’s target this year, the economy must expand by at least 6% in the second half.

Government spending rose by 10.7% in the second quarter, faster than 1.7% in the previous quarter and a reversal of the 7.1% contraction a year earlier. This was the fastest growth since the second quarter of 2022.

Meanwhile, growth in household consumption, which accounts for more than two-thirds of the economy, slowed to 4.6% in the second quarter from 5.5% a year ago.

“In the near term, the growth prospects of the Philippines could be subject to several risks. Higher inflation, especially from food prices, could dampen consumption,” AMRO said.

The think tank expects inflation to average 3.3% in 2024 and 3.1% in 2025, well within the Bangko Sentral ng Pilipinas’ (BSP) 2-4% annual target.

“While upside risks such as wage increases and local food supply shocks remain, the slowdown of headline inflation is expected to continue in the second half of 2024 due to lower international prices of fuel and food, and tariff cuts on imported rice,” it said.

In June, President Ferdinand R. Marcos, Jr. reduced the tariff on rice imports to 15% from 35% until 2028 to help bring down prices of the staple.

“At the same time, the economy could be challenged by a potentially sharp slowdown in major trading partners, such as the US, euro area, and China. Heightened geopolitical risks could increase the likelihood of global supply disruptions and further global economic fragmentation,” AMRO added.

“The country’s long-term potential growth could be constrained by insufficient infrastructure investment, vulnerabilities to climate change, and the prolonged scarring effects caused by the COVID-19 (coronavirus disease 2019) pandemic.”

POLICY ADJUSTMENTS
Amid an improving inflation outlook, the BSP has the leeway to ease benchmark interest rates further to help support economic growth, AMRO said.

“There is room to adopt a less restrictive monetary policy stance if current macroeconomic trends continue. However, if supply-side risks emerge, the whole-of-government approach should be taken to address inflationary pressures,” it added.

The Monetary Board on Aug. 15 cut the policy rate by 25 basis points (bps) to 6.25%, marking its first easing move in almost four years.

Prior to the cut, the BSP kept its policy rate at an over 17-year high of 6.5% for six straight meetings following cumulative hikes worth 450 bps between May 2022 and October 2023 to rein in elevated inflation.

BSP Governor Eli M. Remolona, Jr. has said they could cut rates by another 25 bps within the year. The Monetary Board’s last two policy-setting meetings this year are on Oct. 17 and Dec. 19.

“With regard to the financial system, the authorities should consider a more active use of macroprudential toolkits, strengthen the institutional framework to safeguard financial stability, and deepen the bond and repo markets,” AMRO added.

On the fiscal side, the think tank said the government’s stance for this year and next is expected to remain “neutral” as it expects a gradual improvement in its budget deficit.

“The government is likely to continue its medium-term fiscal consolidation plan at a slower pace to better support economic growth. However, it will be prudent to accelerate the pace of fiscal consolidation if conditions allow,” it said. “In the medium term, restoring fiscal space remains critical to build greater resilience to external shocks amid elevated uncertainty.”

Under the government’s updated medium-term fiscal program, it has capped its budget deficit at 5.6% of GDP this year and at 5.3% next year. It targets to gradually narrow the gap annually to 4.7% in 2026, 4.1% in 2027, and 3.7% of GDP by 2028 as it wants to have fiscal space to invest in the economy.

The government must also focus on upskilling and reskilling to boost labor productivity, according to AMRO, and bolster efforts to attract foreign direct investments and encourage technology transfer.

“Furthermore, a comprehensive strategy for enhancing the country’s competitiveness, including raising infrastructure investment, continuing digitalization and developing a sustainable economy, is crucial to bolster the Philippines’ economic growth potential,” it said. — B.M.D. Cruz