THE PHILIPPINES perhaps TueFFThis year, the government will miss the upper limit of the gross domestic product (GDP) growth target of 6-7%, amid expectations of weaker consumption and investment, Fitch Solutions’ unit BMI said.
“The economy will Fand it is difficult to break the top half of the government’s 6 to 7% growth target. Headwinds from restrictive financial conditions and a weaker external sector will hamper growth,” the report said.
BMI predicts GDP will grow by 6.2% this year, within the government’s target.
In the FIn the first quarter, the Philippines posted GDP growth of 5.7%, faster than the 5.5% a quarter ago.
However, BMI noted that while GDP showed an annual increase in the first quarter, this is still “by no means an accurate representation of the health of the economy.”
“A more detailed breakdown suggests that underlying domestic demand has weakened, even as the external sector showed some tentative signs of recovery. That said, we think there are still reasons to be optimistic even if downside risks dominate,” the report said.
Household spending, which typically accounts for three-quarters of GDP, rose by 4.6% in the first quarter. This was the slowest decline since the 4.8% drop in the first quarter of 2021.
“The risk to our growth prospects largely depends on the recovery of private consumption. In our current forecast, we assume that April’s robust import growth figures point to the first signs of a recovery in household spending.”
“But if May and June data disappoint, this expected recovery in private consumption will not materialize,” it added.
Meanwhile, BMI said sluggish investments will also weigh on Philippine growth prospects.
“Investment activity will remain subdued against the backdrop of high interest rates. The contribution of fixed capital to growth has been very weak indeed, most recently at just 0.5 percentage points (pp).
The Bangko Sentral ng Pilipinas (BSP) has kept its policy rate at a 17-year high of 6.5% since October 2023.
While BSP Governor Eli M. Remolona Jr. has already hinted at the possibility of policy easing in August, BMI said this is “unlikely” at this point due to the weakness of the peso and expectations of a slowdown in easing by the US Federal Reserve.
The peso has been trading at P58 per dollar since May, slowly falling to a record low P59 level.
BMI expects that the central bank will not start cutting interest rates until October, in line with the Fed.
“However, the delayed impact of the policy easing means that its impact is unlikely to be felt until 2025. In fact, business sentiment towards the economy has declined significantly,” the report said.
BMI said the external sector will also provide “less support” in coming quarters as the recovery in exports will be difficult to sustain.
“Several key trading partners face an economic slowdown, following strong first quarter results. For example, we believe that growth in mainland China has peaked and will decline in the coming quarters,” BMI said.
“The strong start to the year for the US economy is also expected to buckle under the pressure of tight monetary policy and a less supportive fiscal environment. Japan, Hong Kong, China and Singapore are no exceptions. Together they account for about 73% of total Philippine merchandise exports.” — Luisa Maria Jacinta C. Jocson