HEALTHY domestic demand and increased government spending likely boosted economic growth in the second quarter, analysts said, while inflation could have breached target last month due to higher energy and food costs.
Consumer price growth figures for July will be released by the Philippine Statistics Authority on Tuesday, to be followed by preliminary gross domestic product (GDP) growth data for the April-June period on Thursday. Both indicators will be considered by monetary authorities when they meet next week to discuss whether to start cutting key interest rates.
The median GDP growth estimate is 6.0 percent for the April-June period, an improvement from the first quarter’s 5.7 percent and within the government’s downwardly revised 6.0- to 7.0-percent target for this year.
Inflation, meanwhile, is expected to have risen to 4.1 percent in July from 3.7 percent a month earlier.
Q2 GDP estimates
Not all economists saw an improvement in second-quarter growth. Emmanuel Lopez, former dean of the Colegio de San Juan de Letran Graduate School, expects a slump to 5.0 percent due to the impact of the El Niño weather pattern, the onset of the habagat, or southwest monsoon, in June, and still-high interest rates.
Union Bank of the Philippines chief economist Ruben Carlo Asuncion also expects the dry spells and droughts brought by El Niño to have led to reduced farm output, job losses and lower incomes that would have slowed GDP growth to 5.3 percent.
“Perhaps the combination of the drought impact, high interest rates, weaker PHP (peso), higher food prices, and the erosion of purchasing power in 2Q24 led to much dissatisfaction among consumers and firms that may have resulted in subdued spending during the quarter,” he said.
“However, this does not mean that people did not spend at all, but rather, price-conscious consumers may have delayed what they can postpone, like buying big-ticket consumer items.”
Philippine National Bank economist Alvin Arogo, on the other hand, expects second-quarter growth to be just slightly higher at 5.8 percent, weighed down by high prices and borrowing costs.
Security Bank Corp. chief economist Robert Dan Roces, for his part, said that “high employment, increased government spending, and inflation still within target” would have supported growth of 5.9 percent.
Rizal Commercial Banking Corp. chief economist Michael Ricafort, Metrobank chief economist Nicholas Antonio Mapa and Sun Life Investment Management and Trust Corp. economist Patrick Ella all expect growth to have hit 6.0 percent.
Ricafort said a “further increase in government spending, especially infrastructure spending, will be a source of additional growth for the local economy.”
Mapa said government spending would be higher given base effects but added that “consumption may once again be soft as households rebuild savings and pay down debt.”
“Investments may be positive but may still be constrained by elevated borrowing costs. Net exports are also likely a drag as exports face soft global demand,” he continued.
Ella had a different view on household spending, saying that this could have recovered in the second quarter.
HSBC Global Research economist Aris Dacanay, who expects growth to have accelerated to 6.3 percent, also said that government spending was likely the main growth driver.
“Apart from more efficient spending, services exports continued to make strides and are now outpacing overseas remittances in absolute growth,” he added.
Dacanay said that a strong labor market likely also kept household spending resilient despite high inflation and interest rates.
The highest forecast came from ING Bank, which as of last month saw growth at 7.1 percent. Robert Cornell, Asia-Pacific head of research, last week said growth would “run close” to 7.0 percent, mainly due to base effects.
Inflation expectations
As for inflation, Lopez again gave the lowest forecast of 3.4 percent, which he said would be due to slower growth in food, electricity and water costs.
“Added to this is the continued appreciation of the peso against other currencies, which as of late is showing its strength and stability,” he said.
Ella, meanwhile, said inflation could have hit 3.7 percent, unchanged from June’s print.
Mapa said that slower inflation for select vegetables and gasoline, offsetting rising beef and diesel prices, would have resulted in 3.8-percent inflation.
“We are also anticipating a sustained moderation in prices for services such as personal care and restaurants and hotels,” he added.
Ricafort, meanwhile, said that temporary price increases in typhoon- and monsoon-hit areas and potential spikes in produce prices due to farm damage could have led to 4.0-percent inflation.
Roces and Dacanay, who also pointed to the impact from last month’s run of bad weather, pegged their estimates at 4.2 percent.
“Despite the recent typhoon’s possible, albeit transitory, impact on food prices, inflation is expected to return to target in August due to favorable base effects,” Roces said.
He added that “for July, higher electricity rates, elevated agricultural commodity prices, and increased domestic oil costs drove inflation, and this was partially offset by lower rice and fruit prices, as well as the peso’s appreciation.”
Arogo, who expects a 4.4-percent result, said this would be due to the “earlier than anticipated normalization in Meralco rates and adverse impact of [the] typhoon on food prices.”
“Although supply-side driven, a breach of 2.0-4.0 percent target inflation band of the BSP could complicate the timing of the forthcoming easing cycle,” he added.
Asuncion, who had the highest forecast of 4.6 percent, said that this would be due to price upticks for some key food items such as vegetables and fruits.
“Although we expect a decline in rice CPI (consumer price index), it seems some food items have also had notable price increases,” he said.
“Moreover, electricity charges, particularly ones serviced by Meralco, have risen by 3.7 percent year-on-year, compared to June’s decline of 20.6 percent from a year ago,” he noted.
Central bank forecast
The Bangko Sentral ng Pilipinas (BSP) last week said that inflation could have risen to 4.0 to 4.8 percent in July due to higher power, fuel and food prices.
It added that it would “continue to monitor developments affecting the outlook for inflation and growth in line with its data-dependent approach to monetary policy formulation.”
Despite the likely uptick, BSP Governor Eli Remolona Jr. has said that the central bank’s policymaking Monetary Board was still on track to cut key interest rates on August 15.
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.
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