The economy is expected to grow by a slower 1.8 percent in 2009, with exports actually expected to contract by one percent and government deficit rising to 2.1 percent of gross domestic product (GDP).
Latest projections made by the private think-tank Economist Intelligence Unit (EIU) showed the economy screeching to a near-halt in 2009 as a result of the weakness in the global economy.
EIU said it is also projecting a deceleration in commodity prices, with the inflation rate falling to six percent because of weaker demand-side pressures and declining world commodity prices.
EIU said it is also revising its growth forecast in 2009 because of the deepening of the global financial crisis which EIU said would cause the sharp slowdown in demand for Philippine exports.
EIU said investments would slow significantly as foreign direct investments dry up and local companies find it harder to raise capital on international markets.
“Weaker external demand and domestic investment will lead to higher unemployment and will constrain consumption growth,” EIU said.
Moreover, EIU expects remittances to slow down and weaken, eroding its power to support domestic consumption which had been the powerhouse supporting the country’s growth.
“High domestic borrowing costs will also weigh on investment and consumption growth in 2009,” EIU said.
EIU said, however, that the decline in inflation rate was an upside since rising inflation had curtailed spending in 2008, eating into the disposable income of consumers.
“The main risk to our inflation forecast is the deeper than expected depreciation of the exchange rate, which would push up the price of imported goods and services,” EIU said.
EIU said there was additional risk if workers should demand higher wages which could prompt companies to raise prices. “Although the risk of a wage-price spiral is receding as inflationary pressures begin to abate,” the report said.
EIU also said President Arroyo is expected to make little progress on reforms during the remainder of her term of office, particularly the government’s main policy aim of balancing the budget.
“Considerable progress towards this goal has been made,” EIU said. “However, the government has now all but conceded that it will not be able to achieve its aim of balancing the budget by 2010, owing to its plans to stimulate the slowing economy with additional expenditures.”
According to EIU, the budget deficit would preclude the possibility of aggressive fiscal stimulus because the government would find it difficult to finance a larger external borrowing requirement in the present market condition.
“As well as the deteriorating economic environment, politics will also help prevent progress on reforms,” EIU said.