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Lower Inflation to Lift Q3 Growth

Stable consumer prices will allow the economy to expand more vigorously in the next two quarters after the gross domestic product grew by just 5.6 percent in the first quarter and 5.5 percent in the second quarter.


I believe economic activities will start picking up in the third quarter after inflation rate eased to a two-year low of 2.4 percent in July, or near the low-end of the government’s target range of 2 percent to 4 percent for 2019.


Low prices will encourage households to spend more, businesses to increase investments and the 
government to proceed with vital infrastructure projects.


More important, a benign inflation outlook will encourage the Bangko Sentral ng Pilipinas (BSP) to shift its focus from price stability to supporting economic growth, especially after the Philippine Statistics Authority reported that the GDP growth in the second quarter was the weakest in 17 quarters or for more than four years.


This put the government’s growth target slightly off track.  Socioeconomic Planning Secretary Ernesto Pernia said to achieve the 2019 growth target of 6 percent to 7 percent, the economy should grow by an average of at least 6.4 percent in the second half.


I believe this is possible, as some of the main factors that led to the slower growth in the first semester have dissipated. A 5.5-percent expansion in the second quarter is not that bad considering the many challenges we had to contend with during the period.


The National Economic and Development Authority listed the major factors that impacted on our economic performance in the second quarter—the El Niño dry spell, the election ban on construction activities during the midterm elections and the delayed implementation of the national budget.


With the approval of the 2019 budget, the government is now in the position to sustain its spending for infrastructure projects, which will become a major stimulus for economic growth in the second half.


Remember that we were coming from a high-interest rate regime last year when the BSP raised the policy interest rate by a total of 175 basis points that had discouraged people from spending on high-value items, such as housing and vehicles. The good news is that the BSP resumed the interest rate reduction on August 8, as the Monetary Board slashed the overnight borrowing rate by 25 basis points to bring it to 4.25 percent. Private banks are expected to follow the BSP’s lead.


BSP Governor Benjamin Diokno also hinted that another rate cut is possible before the end of the year as inflation expectations moderated further to levels consistent with the inflation target.


The inflation peaked to 6.7 percent in September and October last year, so this means prices would most likely soften from last year’s high base.  In fact, the price of rice—the biggest item in the consumer price basket—registered a reduction or deflation in July.


What continues to worry our economic managers is the increasing protectionism in advanced economies, particularly the United States and China. Secretary Pernia noted that the trade tensions had a moderating impact on the information technology-business-process outsourcing sector in the Philippines, where exports of miscellaneous services grew by just 1.3 percent in the second quarter, compared with a double-digit expansion in the previous years.


The BSP’s Monetary Board said the prospects for global economic activity were likely to remain weak amid sustained trade tensions among major economies.


On the other hand, the weaker global economic prospects will help temper the inflation outlook. “The risks to the inflation outlook continue to be seen as broadly balanced for 2019 and 2020, while they are seen to tilt to the downside for 2021,” the BSP said.


It appears that the BSP will likely take more actions to support economic growth in the second half given the benign inflation outlook. “Domestically, the outlook for growth continues to be firm on the back of a projected recovery in household spending and the accelerated implementation of the government’s infrastructure spending program, after the delay in expenditures due to the legislative impasse in the approval of the budget in January to April 2019,” the BSP said.


“On balance, therefore, the Monetary Board believes that the benign inflation outlook provides room for a further reduction in the policy rate as a preemptive move against the risks associated with weakening global growth,” it added.


Based on these statements from the economic managers and the BSP, I am very confident that the economy will recover in the third and fourth quarters on the back of the manageable inflation rate.