Think tanks hike 2022 PH GDP forecasts, but see inflation storm clouds

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MANILA, Philippines—Two UK-based think tanks have raised their growth expectations for the Philippines in 2022, but they flagged high inflation plus the ban on new public infrastructure projects ahead of the May 9 national elections to be spoilers to the 8.3 percent growth seen at the start of the year.

While Pantheon Macroeconomics jacked up its 2022 gross domestic product (GDP) growth forecast for the Philippines to 5.6 percent from 4.5 percent previously, the outlook remained below the government’s 7 to 9 percent target range.

Socioeconomic Planning Secretary Karl Kendrick Chua had said 7 to 9 percent growth will be achievable, especially if the next administration to be headed by presidential race winner Ferdinand Marcos Jr. sustains and builds on policy reforms set in place by the outgoing Duterte administration.

Pantheon Macroeconomics chief emerging Asia economist Miguel Chanco noted that private consumption boosted the 8.3-percent year-on-year GDP expansion posted in the first quarter, which exceeded market expectations.

“Household spending, the mainstay of the economy, rose by a more-than-respectable 3.2 percent quarter-on-quarter, just a touch below the 3.6-percent gain at the end of last year,” said Chanco.

“This helped to keep GDP growth above the pre-pandemic average for a third-consecutive quarter, softening merely to 1.9 percent quarter-on-quarter, from 3.5 percent in the fourth quarter of 2021,” he said.

“The first-quarter gain was more than enough to push consumption above the end-2019 mark for the first time since COVID-19 hit,” Chanco noted.

However, Chanco cautioned that “it would be foolish to extrapolate the speed of this recovery once pent-up demand has all but been exhausted, especially with multiple headwinds weighing on households,” referring to thinning savings yet slower return of quality jobs amid the prolonged pandemic.

“Private consumption in the current [second] quarter is likely to be lackluster. The hit to real incomes from soaring inflation also comes on top of still-subdued confidence, the sluggish labor market and the rebuilding of savings lost since 2020,” Chanco said.

Chanco said second-quarter GDP would likely be 0.3-percent smaller than the first-quarter output, while year-on-year GDP growth could moderate to 8.1 percent.

Chanco added that “the biggest second-quarter pressure point, consumption aside, will be government spending, which usually suffers in the quarter a general election is held.”

Economic agencies had nonetheless sought exemptions for infrastructure projects from the 45-day spending ban prior to the May 9 presidential elections.

“We reckon that the pullback this time will be particularly painful, with expenditures still running well above their long-run uptrend, due partly to the big increase in commitments since the pandemic started,” Chanco said.

“We expect to see business spending taking an election-related pause, too, adding to the likely second-quarter weakness,” Chanco said.

Despite Ferdinand Marcos Jr.’s majority win for the presidency, Chanco believed that “firms are likely to remain in a wait-and-see mode through most of the second half of this year, as well, as Marcos’s economic agenda was never spelled out during the campaign, so policy priorities won’t emerge until his administration starts to take shape in the third quarter.”

In a May 12 report, London-based Capital Economics also hiked its 2022 growth forecast for the Philippines to 8.5 percent from 7.5 percent previously, but warned that elevated inflation could weaken economic recovery from its prior pandemic-induced slump.

“While day-to-day disruption from COVID-19 is largely in the rear-view mirror, new headwinds are building,” said Alex Holmes, Capital Economics Asia economist.

“A jump in prices is eating into consumers’ real purchasing power. High global oil prices due to the war in Ukraine are feeding through to pump prices,” said Holmes.

“April inflation data also showed that food prices have started to rise rapidly again, with the price of meat and corn jumping. The headline rate, which hit 4.9 percent year-on-year last month, is set to rise further and the central bank is set to begin tightening policy,” he said.

“The upshot is that, as the boost from reopening fades and headwinds to consumption bite, the recovery is set to slow,” Holmes continued.

“The economy will likely stop catching up to its pre-crisis trajectory in the second half of the year. Even though we are revising up our 2022 GDP growth forecast on the back of strong [first-quarter] figures, that would nevertheless mean that the economy will still be around 12-percent smaller by the end of this year than if the pandemic had never happened,” Holmes added.

“Looking beyond the high year-on-year growth figures, the overall economic recovery is, and will remain, very weak. That is a key reason to expect the central bank to normalize policy only very gradually,” Holmes said.

Last week, Capital Economics senior Asia economist Gareth Leather said they “expect just two 25-basis point (bp) rate hikes” this year by the Bangko Sentral ng Pilipinas (BSP), from the current record-low 2-percent policy rate — a less conservative estimate than consensus forecasts and financial market expectations.

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