Higher Spending to Hasten Philippine Economic Growth
Our economy grew just grew 4.3 percent year-on-year in the second quarter of 2023 amid the challenging global environment and elevated inflation and interest rates. It is slower than the 6.4 percent in the first quarter, bringing the average expansion in the first semester to a still impressive 5.3 percent.
The slowdown reflects the lagged effects of monetary tightening, which was expected after the Bangko Sentral ng Pilipinas raised the overnight borrowing rate by a total of 425 basis points to 6.25 percent over the past two years to contain domestic inflation and reduce the differential with the US Federal Reserve’s own interest rate.
The high inflation rate also led to softer spending growth. Per the Philippine Statistics Authority, household final consumption expenditure grew 5.5 percent in the second quarter of 2023, compared to 6.4 percent in the first quarter, with clothing and footwear in particular contracting by more than 27 percent.
Government spending was also lower than expected. Based on Oxford Economics’ analysis, the 7.1-percent contraction in government spending in the second quarter shaved off 1.3 percentage points from the headline growth.
The National Economic and Development Authority agrees that the lagged effects of interest rate hikes, along with lower government spending and global economic slowdown, affected our GDP growth in the April-June quarter.
Neda Secretary Arsenio Balisacan estimates that to attain the lower end of the government’s 2023 growth target of 6 percent to 7 percent, the economy should grow by 6.6 percent in the second half. For me, this remains possible, if government spending will catch up according to plan. Infrastructure projects should proceed as scheduled to drive construction activities and generate employment.
The resumption of school classes later in August will hopefully lead to higher household spending in the third quarter. This is the time for students to purchase school uniforms and other clothes, bags and school supplies. The expenditures will certainly lift the retail and manufacturing sectors.
Data from the PSA show that the agriculture and fisheries sector barely grew in the second quarter, mainly on reduced fish production because of seasonal factors. We hope the sector will recover soon to support our growing food demand.
The silver lining in the second-quarter national income accounts is the robust 8.6-percent growth of our gross national income, which is a broader measure of economic output as it also includes the contribution of our transactions with other countries. Per the PSA, net primary income from the rest of the world jumped 90.6 percent year-on-year in the second quarter.
Other indicators also point to a more inclusive growth in the second quarter, as the employment level reached a record high in June, while tourism rebounded significantly, leading to the reopening of hotels, restaurants and other establishments.
The unemployment rate in the Philippines in fact fell to 4.5 percent in June 2023 from 6 percent a year ago as the employed population increased to 48.84 million from 46.59 million. Many of them are young workers, which means the economy will benefit from demographic dividend in many years to come.
The inflation rate also eased for the sixth straight month to 4.7 percent in July, giving the BSP the flexibility to exit the monetary tightening cycle and even begin to reduce the interest rate by the fourth quarter of 2023 or the first quarter of 2024.
International credit rating agencies remain confident about the Philippine economic prospects. Per Finance Secretary Benjamin Diokno, the Philippines has returned to the path of an “A” investment-grade rating after showing its resilience during the Covid-19 pandemic.
The government hopes that our sovereign credit rating will reach the coveted “A” level by the end of the term of President Ferdinand Marcos Jr. in 2028. This would certainly attract the attention of global investors, enhance the country’s credit worthiness and help reduce the country’s borrowing cost.
The Philippines currently enjoys a “BBB+” sovereign credit rating from S&P Global, which is two ranks higher than the minimum investment grade and just one level below the “A-“ rating.
Japan-based Rating and Investment Information Inc. (R&I) last week affirmed the Philippines’ investor-grade credit rating at “BBB+” and revised its outlook to “positive” from “stable” because of the country’s robust macroeconomic fundamentals, improving fiscal position, sound banking system, comfortable external payments position and stable political environment.
I believe that despite the lower-than-expected GDP growth in the second quarter, the economy will see an improvement in the succeeding periods that will eventually help us achieve the desirable “A” ranking of credit-worthy nations.
There is nothing to worry—the Philippine economy is sound and should bounce back strongly in the succeeding quarters.