February 9, 2023

Filipino Guardian

Sentinels of Filipino Free Press

Inflation and interest rates could dampen retail growth in 2023

A bazaar is seen at a mall in Manila on June 12. – PHILIPPINE STAR/ KRIZ JOHN ROSALES

By Revin Mikhael D. Ochave, reporter

The growth of the Philippine retail sector is expected to slow next year as consumer spending is likely to be impacted by elevated inflation and rising interest rates.

Barsali Bhattacharyya, industry manager at the Economist Intelligence Unit (EIU), told BusinessWorld that local retailers will be hit by weaker consumer spending.

“In 2023, the pace of growth will slow to 2.7% as persistently high inflation and rising domestic interest rates hurt consumers’ purchasing power,” Ms Bhattacharyya said via email.

The Bangko Sentral ng Pilipinas (BSP) has hiked interest rates by 225 basis points so far this year in a bid to tame inflation and counter the peso’s weakness.

Inflation accelerated to 6.9% in September, bringing the nine-month average to 5.1% as food, commodity and utility prices continue to rise. GNP expects inflation to average 5.6% this year and 4.1% in 2023.

Consumers will need to spend more on groceries over the next year as global commodity prices remain high, Ms Bhattacharyya said.

“High global soft commodity prices will force consumers to spend more on groceries and staples, taking the share of grocery retail sales to over 59% by 2023. We expect that proportion to remain above 2019 levels through at least 2025, underscoring the country’s dependence on food imports,” she said.

This year, the retail sector is growing by 5.9%, mainly due to the reopening of the economy and the easing of 2019 coronavirus disease (COVID-19) restrictions, Ms Bhattacharyya said.

“The Philippine consumer market has recovered strongly from the pandemic-induced slowdown. The easing of COVID-19 measures bodes well for consumption and we estimate that retail sales will grow by 5.9% in real terms in 2022, removing the impact of inflation,” Ms Bhattacharyya said.

Online sales will continue to increase in 2023 due to increasing digitization in the country.

“The strong shift towards digitization seen during the pandemic will continue to gain ground, with online sales of goods expected to account for 4% of total retail sales in 2023,” Ms Bhattacharyya said.

Philippine Retailers Association (PRA) vice chairman Roberto S. Claudio said the group has a slightly higher growth forecast for next year than the EIU forecast.

“We have a higher 3.5% growth forecast for 2023 due to further easing of COVID-19 protocols and consumer spending as people have more freedom to travel with the end of lockdowns and policies to encourage local tourism,” he said in a telephone interview.

Mr Claudio said the retail sector was showing better growth this year as consumers returned to malls and shops.

“We almost agree with EIU on the 2022 growth rate. This figure was selected from PRA figures of consumers returning to in-store and mall shopping while online business continues to grow, but at a slower pace than 2020-2021,” said Mr. Claudio.

He does not expect consumer spending to be materially affected by rising inflation and interest rates.

“During poor economic conditions, consumers spend more on groceries, recreation like alcohol, sports and outdoor activities. Luxury goods will suffer. People look for escapism in difficult times,” said Mr. Claudio.

Rizal Commercial Banking Corp. chief economist Michael L. Ricafort said retail sector growth could hit 6% in 2023, in line with the economy’s gross domestic product (GDP) growth.

The government targets GDP growth of 6.5-8% in 2023.

“Further reopening of the economy led to more employment; higher sales and more economic activity, supporting retail sales…Online retail and other business transactions would also be boosted by further reopening of the economy, as these have accelerated since the pandemic,” Mr. Ricafort said.

“However, higher prices and spending on groceries and other staples due to higher global and local inflation, as well as higher interest rates/credit costs, would offset retail sales growth, both online and physical, and overall economic growth,” he added.