Economic Growth in the Philippines Shows Signs of Recovery Despite Challenges

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Analysts predict a slight economic growth uptick for Q3 2023

The Philippine economy is displaying signs of recovery in the third quarter of 2023, driven by government spending, although persistent inflation and high interest rates may be impacting household consumption, according to experts.

A survey of 18 economists and analysts conducted recently suggests a median growth estimate of 4.9% for the period from July to September. This is a slight acceleration compared to the preliminary 4.3% growth observed in the second quarter. However, the pace of growth remains slower than the robust 7.7% recorded in the same period a year ago.

If these predictions materialize, the average GDP expansion for the first nine months of 2023 will stand at 5.2%, still below the government’s full-year target of 6% to 7%. The Philippine Statistics Authority (PSA) is set to release the official third-quarter GDP data on November 9.

Analysts believe that the recovery in government spending and consistent household consumption likely fueled the GDP growth in the July-to-September period. However, the rate of economic expansion may have been restrained by ongoing inflation and high borrowing costs.

Aris Dacanay, an economist at HSBC Global Research, noted that increased government spending should have positively impacted overall GDP. Still, household consumption and private investment might have weighed down the growth due to factors like elevated prices and rising household debt in a high-interest rate environment.

Recent Treasury data showed that state spending increased by 4.12%, reaching PHP 3.82 trillion in the first nine months of the year, compared to PHP 3.67 trillion the previous year. Nevertheless, growth in public construction could be hampered by weaker private sector activities due to the high-interest rate environment.

The previous quarter’s GDP growth was slower than expected, partly attributed to a 7.1% contraction in government spending. Household consumption also showed a slower growth pace of 5.5% in the second quarter, down from 8.5% the previous year.

Miguel Chanco, Chief Emerging Asia economist at Pantheon Macroeconomics, estimated that economic growth could have further decelerated to 3.1% in the third quarter due to unfavorable base effects and deteriorating private consumption.

Government spending is expected to have grown by over 2% in the third quarter, reversing a sharp contraction in the previous quarter. Meanwhile, increased activities during the holiday season may offer support to the economy.

Despite these challenges, the Philippine economy is predicted to expand by 5.2% in 2023, slower than the 7.6% growth in 2022 but still outperforming regional peers.

Economists warn that the aggressive policy tightening measures taken by the Bangko Sentral ng Pilipinas may pose a threat to GDP growth for the remainder of the year. The impact of past monetary tightening is expected to continue constraining domestic demand, particularly business investment.

The Bangko Sentral ng Pilipinas resumed monetary tightening with a 25-basis-point rate hike in October, bringing the policy rate to a new 16-year high of 6.5%. Since May 2022, the central bank has raised rates by a cumulative 450 basis points. Persistent inflation, averaging 6.6% from January to September, remains above the central bank’s 2023 forecast of 5.8%.

The Philippine economy is expected to perform better in 2024, with easing inflation and lower interest rates. However, clouds of uncertainty continue to loom over the economic outlook for 2023, mainly due to ongoing high inflation and interest rates, which are likely to limit private investment. The upcoming elections may also influence policy decisions and economic outcomes in the near future.