Inflation poses challenge to 2024 growth prospects

Yearender

MANILA, Philippines — High inflation was one of the pressing challenges the Philippines faced this year as it affected consumption, which serves as a key driver of economic growth.

While inflation has eased and the government is holding on to the view that the growth target can be achieved for this year, elevated inflation is expected to still pose a challenge to the country’s economic performance next year with the onset of El Niño.

As such, the government is being urged to continue measures to address inflationary pressures and mitigate the impact of high prices on consumption.

The country started 2023 with the headline inflation rate hitting a 14-year high of 8.7 percent in January, driven mainly by food price increases.

National Economic and Development Authority (NEDA) Secretary Arsenio Balisacan said the country faced many challenges throughout the year such as inadequate imports to cover domestic demand; high prices of farm inputs; crops destroyed due to typhoons; animal diseases, as well as logistical bottlenecks and competition issues along the food supply chain.

As part of efforts to address inflation as well as ensure food and energy security, an executive order issued in May created the Inter-Agency Committee on Inflation and Market Outlook, which serves as an advisory body on measures to keep inflation within government target.

Even as inflation has slowed and is now closer to the two to four percent target, Balisacan said the government cannot be complacent.

Data from the Philippine Statistics Authority showed the headline inflation rate slowed to a 20-month low of 4.1 percent in November from 4.9 percent in October, and the eight percent print in November 2022.

In the January to November period, inflation averaged 6.2 percent.

“We continue to have the highest inflation rate among Southeast Asian peers. This is amid our many risks, including the El Niño phenomenon and the simmering geopolitical tensions that may increase uncertainty and disrupt supply chains,” Balisacan said.

Higher inflation, particularly food inflation, has affected household consumption growth, which slowed to five percent in the third quarter from 5.5 percent in the second quarter.

The economy, however, still grew at a faster pace of 5.9 percent in the third quarter compared with the previous quarter’s 4.3 percent, supported by the recovery in government spending.

For the first three quarters of 2023, the country’s average gross domestic product (GDP) growth was at 5.5 percent.

To meet the lower end of the government’s six to seven percent growth target for this year, Balisacan said the economy needs to grow by at least 7.2 percent in the current quarter.

“We are confident that we can still reach the lower end of the target – or, at the very least, hit a figure near the lower end of the range,” he said.

He is also upbeat on fourth quarter economic growth, citing slower inflation as well as positive labor market and manufacturing data.

Multilateral agencies Asian Development Bank (ADB) and the World Bank, however, expect the country’s economic growth for this year to fall below the government’s target.

The ADB is forecasting a 5.7 percent growth for the Philippines this year, while the World Bank expects the Philippine economy to grow by 5.6 percent for 2023.

Pantheon Macroeconomics chief emerging Asia economist Miguel Chanco said he does not share the NEDA chief’s optimism in achieving the growth target for this year, despite the stronger than expected bounce in GDP in the third quarter.

“That owed largely to a big bounce-back in government spending growth, which we don’t think is replicable nor sustainable, given that the consolidation of the budget deficit from the pandemic-era blowout is still far from over,” Chanco said.

He said third quarter economic growth also masked the further slowdown in private consumption growth, which is the economy’s main engine.

For Oikonomia Advisory and Research Inc. president and chief economist John Paolo Rivera, achieving the government’s growth target this year “is possible if inflation is stabilized, interest rates relaxed to stimulate private consumption, [and] government spends on productive ventures that prompt productivity and faster capital accumulation.”

As for Rizal Commercial Banking Corp. chief economist Michael Ricafort, the country’s GDP growth could be around 5.5 to six percent this year, to be supported by the government’s catch-up spending especially on infrastructure, overseas Filipino workers’ remittances as well as improved employment data.

For 2024, the government has narrowed the economic growth target to 6.5 to 7.5 percent from the previous range of 6.5 to eight percent.

Prior to the adjustment in the growth target, Balisacan said there are challenges to achieving the initial growth goal such as elevated inflation, as well as geopolitical tensions and export bans being implemented by other countries, which may push up prices.

He also cited government agencies’ limited absorptive capacity as a risk to growth next year.

Similar to their outlook for 2023, the ADB and World Bank’s growth forecasts for next year are below the government’s target.

The ADB’s 2024 growth forecast for the Philippines is at 6.2 percent, while the World Bank’s GDP growth outlook for the country for next year is at 5.8 percent.

Economists’ growth forecasts for next year are also lower than the government’s growth target.

For Pantheon Macroeconomics, Chanco said Philippine economic growth is expected to slow down next year, with GDP growth below the five percent mark.

Rivera said his growth outlook for next year is at five to six percent, provided headwinds are mitigated and productive spending from both private and public sectors are made.

Ricafort said Philippine economic growth could normalize to around 5.5 to six percent in the next five to 10 years.

World Bank senior economist Ralph Van Doorn said the use of both monetary and non-monetary policy measures would help contain inflationary pressures.

He also said the continued implementation of targeted social protection and transfer programs would mitigate the impact of high inflation on poor and vulnerable Filipinos.

To bring down inflation in the short-term, he said improved forecasting and planning would help in stabilizing food prices, reducing market volatility, and ensuring food supply.

“Assuming the government can do anything, fiscally, then these efforts need to be dedicated to cushioning the slump in household spending,” Chanco said.

Rivera said the agriculture sector should be strengthened to mitigate food shortages that trigger inflation.

“Government should focus on infrastructure and social services to ensure that economic activities are sustained,” he said.

Ricafort said reforms to boost the country’s attractiveness as an investment destination would support growth.

“The delivery of more reform measures, especially fiscal or tax reform measures and other economic reform measures that would help further ease limits on foreign ownership, would help attract or encourage the entry of more foreign investment,” he said.

Balisacan said the government recognizes the need to step up implementation of measures to tackle supply-side limitations and curb the increase in food prices.

“We have been mobilizing for the anticipated impacts of the upcoming El Niño through a comprehensive, coordinated, science-based approach involving the national and local governments and the water, agriculture, energy, health, and public safety sectors,” he said.

He also said the government will expedite the execution of programs for public services and infrastructure, as well as properly implement reforms and initiatives to promote investment and trade that can create jobs.