Spoiled by inflation, Philippine economy grows below target in Q1

MANILA, Philippines — The Philippine economy grew faster in the first three months of 2018, meeting market expectations although it missed the government’s target band for the year due to rising prices of key consumer items, the country’s statistics agency reported on Thursday.

The country’s gross domestic product—or the value of all finished goods and services produced in the country—grew 6.8 percent in the first quarter, quicker than the downwardly revised 6.5 percent in the preceding three months and the 6.4 percent expansion rate in the comparable period last year.

The latest growth pace matched market estimates, but settled near the low-end of the government’s 7-8 percent target range for 2018.

Among the major economic sectors, industry recorded the fastest growth at 7.9 percent, followed by services at 7 percent. However, agriculture, which has historically contributed a tenth to the country’s GDP, expanded at a sluggish rate of 1.5 percent.

Meanwhile, net exports worsened in the January-March period, adding risks to growth.

Spoiler

In a press conference, Socioeconomic Planning Secretary Ernesto Pernia said accelerating inflation, which weakened consumer confidence, is the “spoiler” of the country’s growth.

But Pernia pointed out that the Philippines remains to be one of the best performing economies in the region—next only to Vietnam’s 7.4 percent, the same as China’s 6.8 percent and higher than Indonesia’s 5.1 percent.

“If not for the first quarter 2017 to first quarter to 2018 rate of increase in inflation, real GDP growth could have been well within our growth range target,” Pernia said.

“We need to really focus on inflation especially because it is the number one concern expressed by Filipinos in surveys,” he added.

The Duterte administration’s tax reform law—which lowers personal income taxes while raising excise levies on fuel and cigarettes, among others—has been blamed for the recent jump in prices of widely used goods and services.

Using 2012 as base year, inflation in April quickened to a five-year high of 4.5 percent, putting the year-to-date tally above the Bangko Sentral ng Pilipinas' 2-4 percent target range.

Household spending was up 5.6 percent in the first quarter, slightly lower than the 5.9 percent recorded in the same period last year.

Useless?

The central bank had repeatedly sought to temper calls for adjustments in benchmark interest rate, saying the surge in commodity prices stoked by the new tax law is only “temporary.”

But last week, BSP Governor Nestor Espenilla struck a hawkish tone and said the central bank won't think twice to take “decisive” action should inflation remain elevated.

Solid economic growth is also expected to add pressure on the central bank to tweak policy rates to tame inflation.

Asked if it’s time for monetary authorities to lift key rates, Socioeconomic Planning Undersecretary Rosemarie Edillon explained that the BSP’s tools might not be able to cool down inflation, noting that building price pressures were being driven by supply-side factors.

“Actually, a lot of inflation we’re seeing is due to supply constraints and, therefore, the strategy to address this is really with respect to the supply... which cannot be addressed with increasing the interest rates,” Edillon said.

The central bank will review its monetary policy stance on Thursday afternoon, with markets already pricing in a rate hike.

The BSP projects inflation to hit 3.9 percent this year and moderate to 3 percent in 2019.