Deep ‘scarring’ from virus holds back PH recovery

The Philippines’ economic recovery lags behind in Asia, no thanks to deep pandemic scarring, and it could take beyond 2023 to return to its prepandemic growth potential, think tanks said.

“Lackluster fiscal support means the Philippines will experience the slowest recovery from the pandemic in Asia,” London-based Capital Economics said in its latest emerging Asia economic outlook report on Wednesday.

After last year’s recession when annual gross domestic product (GDP) shrank by a record 9.6 percent, Capital Economics expects GDP to revert to 4.5-percent growth this year, 10.5 percent next year and 8.5 percent in 2023.

While its 2022 and 2023 GDP growth forecasts for the Philippines were the highest in Asia, Capital Economics said the significant economic scarring means output from the Philippines would not be back to its prepandemic path in the next two years.

“GDP remains well below its precrisis level, and the recovery is likely to be held back by scarring from the pandemic. Business insolvencies, weaker household balance sheets, a collapse in investment and labor market scarring mean GDP is unlikely to recover to its precrisis trend. We expect GDP to still be more than 10 percent smaller than its precrisis trend by the end of 2023—by far the largest gap in the region,” Capital Economics said.

In a separate report also last Wednesday, UK-based Oxford Economics noted that despite the 11.8-percent year-on-year GDP growth posted in the second quarter, the Philippines’ output remained 9 percent below prepandemic levels, the worst in Asia-Pacific.

Both think tanks nonetheless pointed to green shoots of near-term economic recovery amid easing of quarantine restrictions since last month.

“Our subtrackers for Malaysia, Thailand, Vietnam and the Philippines showed a modest uptick in September from August lows, as these economies emerge from lockdowns on the back of ebbing daily COVID-19 cases,” Oxford Economics senior economist Lloyd Chan said.

“After a lackluster third quarter, the prospects are good for a decent rebound in the coming quarters. New cases of COVID-19 are down sharply from their peak and restrictions have eased. While vaccine coverage is low—20 percent of people are fully vaccinated—this should improve now that supplies are picking up. We expect a gradual recovery in consumer spending as daily life returns to normal,” Capital Economics said.

While Capital Economics estimated headline inflation to average at above-target 4.2 percent this year, the rate of increase in prices of basic commodities “should fall back relatively quickly as the temporary factors driving inflation higher, namely a jump in food and energy prices, unwind.”

“A large output gap will help keep underlying price pressures under control,” Capital Economics added, as it projected inflation to ease to within-target 2.2 percent next year and 3 percent in 2023.

In another report on Wednesday, Oxford Economics said it “[remains] of the view that inflation is not as big a worry for Asia-Pacific as a whole, as in the US and many other major economies.”

It said administrative measures continued to play an important role in containing inflationary pressures.

Several Asian economies, including Indonesia, the Philippines, Malaysia, Thailand and Hong Kong have leaned on subsidies to limit the pass-through to domestic fuel and electricity prices, Oxford Economics India and Southeast Asia economics head Priyanka Kishore said, noting that the Philippines had also cut tariffs on food items such as pork and rice to contain risks of runaway inflation.

Like Capital Economics’ view, Oxford Economics said that “to a large extent, the inflation trajectory reflects Asia-Pacific’s weak growth performance, which has deterred businesses from passing on higher costs to consumers and kept core prices in check.”