Q1 growth just under target – poll

TRIMMED This photo dated Feb. 17, 2023 shows the Makati skyline from Ayala Avenue. The International Monetary Fund lowered its growth forecast for the Philippines this year to 5.3 percent from 6.0 percent after a dismal showing at the second quarter. PHOTO BY J. GERARD SEGUIA

PHILIPPINE economic growth likely accelerated to just below target in the first quarter (Q1) despite renewed inflationary pressures and high interest rates, analysts polled by The Manila Times said.

The median estimate of 5.9 percent — just short of the government’s 6.0- to- 7.0-percent goal for 2024 — is higher than the previous quarter’s 5.6 percent but lower than the year-earlier 6.4 percent.

Consumption would still be a primary driver as inflation had markedly fallen year on year, but the analysts warned that with the rate having risen in February and March, high borrowing costs would remain a constraint.

Inflation, they said, could have breached the 2.0- to 4.0-percent target at 4.1 percent in April, prompting monetary authorities to keep interest rates higher for longer, delaying cuts that could spur economic growth.

Inflation results for last month are scheduled to be released Tuesday, May 7, while preliminary first-quarter gross domestic product (GDP) growth data will be issued on Thursday, May 9.

Last week, Finance Secretary Ralph Recto said that January-March GDP growth could have improved to 5.8 percent or as much as 6.3 percent despite renewed inflationary fears and heightened geopolitical tensions.

Q1 GDP estimates

For Pantheon Macroeconomics chief economist Miguel Chanco, “the main downside risk” for first-quarter growth would be exports.

“[T]he data there have been noisy of late, but we expect net trade to provide a material cushion to the Q1 headline slip,” he said.

Chanco expects January-March GDP growth of 5.3 percent.

Oxford Economics assistant economist Makoto Tsuchiya has a slightly higher 5.5-percent estimate, which he said could have been driven by a quarter-on-quarter export rebound.

The private consumption that has led Philippine growth would have remained subdued due to consumer pessimism, Tsuchiya added, and private investment also likely stayed sluggish.

UnionBank of the Philippines chief economist Ruben Carlo Asuncion, meanwhile, said rising inflation and high interest rates could have led to below-potential growth of 5.7 percent.

It is “not all gloom-and-doom,” however, given a weaker peso that has driven overseas Filipino worker remittances — which lifted basic demand — and tech exports that stayed robust in January and February and also supported manufacturing.

Sharing 5.9-percent estimates were Chinabank Research, Philippine National Bank (PNB) economist Alvin Arogo and HSBC Glob al Research Aris Dacanay.

Chinabank Research said household spending would have posted an uptick as inflation had eased. Moreover, the rebound in exports, particularly for semiconductors, likely boosted growth the most.

“We anticipate that the Philippine economy has a higher growth potential this year, supported by easing inflationary pressures, a recovery in fiscal spending and exports, and possible monetary easing in the latter part of the year,” it said.

PNB’s Arogo also expects household consumption to have strengthened as average inflation improved to 3.3 percent during the quarter and with most labor market indicators favorable.

Dacanay said the country would “continue outperforming its Asean (Association of Southeast Asian Nations) peers.”

Robust consumption, good labor market conditions and resilient exports have helped the country remain on track to achieve a high growth trajectory, he added.

“Government spending rose year on year. Learning from last year’s low utilization rate, agencies made it a priority to spend their budget more efficiently in 2024,” Dacanay continued.

Rizal Commercial Banking Corp. chief economist Michael Ricafort, ING Manila Bank senior economist Nicholas Antonio Mapa, Dean Emmanuel Lopez of the Colegio de San Juan de Letran Graduate School and Manulife Investment Management Philippines head of Equities Mark Canizares all expect growth to have hit the lower end of this year’s target at 6.0 percent.

Ricafort said this would have been supported by national government spending, especially on infrastructure, after some tightfistedness last year.

Mapa, meanwhile, said robust consumption despite relatively high inflation and a positive contribution from net exports would have driven first-quarter GDP growth.

“Wild cards will be government spending and likely capped capital formation due to elevated borrowing costs,” he added.

Lopez believes that government spending and private support will accelerate growth this year and in the next four years.

Canizares also agreed that consumer spending would keep propping up growth, but added that inflation posed risks to the outlook.

“Given the current macroeconomic landscape, the government has to carefully balance supporting the economy in the short term through an increase in government spending while pursuing its path of reducing the country’s budget deficit,” he said.

Having the highest forecast of 6.4 percent was Bank of the Philippine Islands (BPI) senior economist Emilio “Jun” Neri, who said higher capital goods spending would potentially drive growth further.

“We actually think the upside surprise to Philippine growth is pretty strong this year as election spending picks up in the second half of 2024 and inflation returns to 4.0 percent target,” he added

“If NEDA (National Economic and Development Authority) awards more PPP (public-private partnerships) projects to the private sector and if adjustments in the local property sector lead to a ramp-up in commercial, industrial, tourism/hospitality residential projects the upside surprise to growth will demonstrate how BSP’s (Bangko Sentral ng Pilipinas) policy normalization is more beneficial than harmful to growth.”

The economists said full-year growth could hit the lower end of the government target at 6.0 percent as inflation, following a spike within the year, would return to the 2.0- to 4.0-percent band before 2024 ends.

April inflation expectations

Higher prices of key food items, energy costs and unfavorable base effects, they said, could have pushed inflation up from 3.7 percent in March to past the target last month.

The BSP issued a 3.5- to 4.3-percent forecast for April inflation last week. It cited continued price increases for rice and meat, higher gasoline prices and a peso depreciation as factors.

The central bank said it would “continue to monitor developments affecting the outlook for inflation and growth in line with its data-dependent approach to monetary policy decision-making.”

The BSP’s benchmark rate is currently at 6.5 percent — the highest since 2007 — after rate hikes totaling 450 basis points beginning May 2022 as inflation surged following Russia’s invasion of Ukraine.

Letran’s Lopez, who offered the lowest inflation forecast of 3.5 percent, said a slowdown was likely as consumer price goods would have stayed stable “despite the reeling effects of El Niño to food products.”

An uptick of 3.9 percent, meanwhile, Oxford Economics’ Tsuchiya said, would be due to unfavorable base effects.

BPI’s Neri and Chinabank Research said inflation could have hit the upper end of the target at 4.0 percent, mainly due to upward pressures from food and energy prices.

Security Bank Corp. chief economist Robert Dan Roces, who expects a 4.1-percent result, said the central bank would again opt to keep key interest rates steady during the upcoming May 16 policy meeting.

“The central bank is expected to maintain a hawkish tone in their forward guidance to signal their commitment to price stability,” he added.

“With inflation projected to overshoot the target in the subsequent months, the BSP will maintain a tight monetary policy stance to anchor inflation expectations and prevent second-round effects.”

ING’s Mapa, Pantheon’s Chanco, HSBC’s Dacanay and RCBC’s Ricafort also expect 4.1-percent April inflation, primarily due to base effects and contributions from higher food prices.

“We expect rice inflation to drive headline inflation above target for the next 2 months,” Mapa said.

Chanco, meanwhile, said food-price base effects would turn favorable from May onwards, with core inflation remaining relatively subdued.

Dacanay said that “since it is highly expected that headline inflation will eventually breach the central bank’s target band, we do not expect the April inflation print to affect monetary policy, unless headline CPI (consumer price index) rises even faster than expected.”

PNB’s Arogo anticipates inflation to have hit 4.2 percent last month, driven by continuous price hikes in essential food items like rice and meat.

Faster inflation, particularly if it exceeds target, will bolster the argument for maintaining the policy rate unchanged in May, he added.

With the highest forecast of 4.5 percent, UnionBank’s Asuncion said the impact of the El Niño weather pattern and volatility from global oil prices likely worsened domestic inflation.

“We think that the [BSP’s policymaking] Monetary Board (MB) will definitely look into this and if inflation expectations are de-anchored. We think that the MB will not move and maintain the current interest rate levels,” he added.