December 7, 2022

Filipino Guardian

Sentinels of Filipino Free Press

GNP sees slower growth through 2024

4 min read

THE ORTIGAS business district, pictured November 9, 2021. — PHILIPPINE STAR/ MICHAEL VARCAS

THE PHILIPPINE ECONOMY is expected to meet the government’s growth target this year, but the central bank expects slower expansion into 2024 due to the impact of high interest rates.

In its latest monetary policy report, the Bangko Sentral ng Pilipinas (BSP) said gross domestic product (GDP) growth is likely to be within the Development Budget Coordination Committee’s (DBCC) target of 6.5-7.5%.

The Philippine economy grew 7.6% in the third quarter, bringing the average year-to-date growth to 7.7%.

“But economic headwinds could lead to slower GDP growth in 2023 and 2024,” the BSP said. “2024 forecast is lower, reflecting slower external demand as well as the impact of monetary tightening on GNP.”

The BSP has not given its forecast, but the DBCC is aiming for GDP growth of 6.5-8% in 2023 and 2024.

The BSP raised interest rates by 75 basis points (bps) last week to 5%, the highest in almost 14 years. Overnight and credit facility rates were also raised to 4.5% and 5.5% respectively.

Since May, the Monetary Board has raised interest rates by 300 basis points to curb inflation and support the peso.

The BSP said domestic economic activity has recovered above pre-pandemic levels amid the easing of mobility restrictions and the resumption of face-to-face classes.

“Domestic growth is seen as resilient in the following quarters amid loosening mobility restrictions, strong capital formation, the return of domestic and foreign tourism, as well as larger MSME (micro, small and medium-sized enterprise) activities driven by the resumption of face-to- Face classes,” it said.

Implementation of the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, the Financial Institutions Strategic Transfer (FIST) Act and the second tranche of personal income tax cuts will further improve the domestic outlook in 2023 and 2024, the BSP said .

The BSP noted that the economy is expected to operate “slightly above potential”.

“Policy Analysis Model for the Philippines (PAMPh) 4 estimates of GNP suggest that the output gap is expected to turn positive in 2023, broadly reflecting continued expansion in 2022. The output gap will return to broadly neutral territory in 2024 as a result of interest rate adjustments penetrating the economy,” it said.

“Improved foreign trade competitiveness and sustained remittances amid peso depreciation could drive the wider domestic output gap notwithstanding the slowing global growth outlook. Meanwhile, potential output is expected to recover as economies continue to reopen, working conditions improve and investment growth continues.”

According to BSP, inflation is expected to remain elevated in the short term and above the 2-4% target range by Q2 2023.

“Inflation is expected to decelerate back within the target range by Q3 2023 and, due to negative base effects in Q4 2023, to approach the lower end of the target range by Q1 2024 before recovering by Q2 2024. Quarter of 2024 stabilized at mid-point,” it said.

“The projected slowing of the inflation path is due to the softening global oil and non-oil prices and negative base effects from fare adjustments in 2022, as well as the impact of BSP’s cumulative policy rate adjustments.”

BSP last week raised its average baseline inflation forecast to 5.8% this year from 5.4% earlier. It also raised the inflation forecast for 2023 to 4.3% from 4.1%, while lowering the forecast for 2024 to 3.1% from 3.2%.

“However, high inflation remains a risk. We forecast inflation of 7.8% or even higher in November, with upside risks still mainly coming from food,” said Domini S. Velasquez, chief economist at China Banking Corp.

October inflation rose to a nearly 14-year high of 7.7% in October, from 6.9% in September and 4% a year earlier. Excluding food and fuel prices, core inflation rose to 5.9% in October.

“We can’t say it definitely won’t exceed 8% as vegetable and meat prices are on an upward trend. We might see some more pressure as we approach Christmas where demand tends to pick up,” Ms Velasquez said.

Security Bank Corp. chief economist Robert Dan J. Roces said the third-quarter growth result suggests “comfortable room” for more rate hikes.

“Forward guidance so far points to further tightening as the central bank has work to do as core inflation remains above target and still rising – suggesting more pass-through in food and energy prices amid demand-side appetite – further raising price expectations,” he said.

If the US Federal Reserve continues to tighten monetary policy, BSP Governor Felipe M. Medalla told Reuters that the central bank will need to raise interest rates to prevent the peso’s weakness from fueling inflation further.

The US Federal Reserve has hiked borrowing costs by 375 basis points since March, bringing interest rates to 3.75-4%.

“We think BSP will continue to be aggressive and match the Fed’s December 50bps. By early next year, GNP is likely to move in lockstep with the Fed, both to prevent the peso from depreciating and to further accelerate core domestic prices,” Ms. Velasquez said.

Asian Institute of Management economist John Paolo R. Rivera noted that while BSP could still raise rates, but not as aggressively as 75 basis points as inflation has not yet peaked and the Fed is showing signs of slowing .

“However, if inflation picks up faster as expected, GNP can use other monetary tools to dampen inflation,” he added. — KBT

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