Nomura Global Market Research
According to Nomura Global Markets Research, the Philippine economy is going to experience a further slowdown in the coming quarters due to easing consumer spending. Additionally, the research firm has revised down its GDP growth forecast for the second quarter from 6.4% to 5.6%. Moreover, it has also lowered the projection for third-quarter GDP growth to 4.8%.
Nomura analysts attribute the moderation in consumer spending to falling household purchasing power. In the first quarter, the Philippine economy grew by 6.4%, the slowest in two years, but still within the government’s target range of 6-7% for 2023.
GDP Breakdown:
In the first quarter, household final consumption expenditure, which contributes around three-fourths of GDP, grew by 6.3%. However, this growth rate was slower than the 7% in the previous quarter and the 10% from last year, primarily due to increased inflation.
Public infrastructure spending expected to improve, but private investment faces challenges from higher interest rates. Government plans to allocate 5.3% of GDP, around P1.29 trillion, to infrastructure spending this year. Gross capital formation grew by 12.2% in the first quarter, slower than last year’s 17.7% growth.
Impact of Weak US Economy:
Nomura predicts weakening export growth due to a potential slowdown in the US economy. The research firm expects the current account deficit to remain at 4.1% of GDP in 2023, reflecting declining exports and increased imports of capital goods for infrastructure projects, as well as higher food imports to address domestic supply shortages.
This forecast exceeds the projection of the Bangko Sentral ng Pilipinas (BSP), which expects a $17.1-billion deficit equivalent to 4% of GDP in 2023. In 2022, the country posted a current account deficit of $17.8 billion, wider than the $5.9-billion gap in the previous year, primarily due to an expanded trade deficit.
Growth Forecast for the Fourth Quarter:
However, Nomura has raised its growth forecast for the fourth quarter to 5.1% from the previous estimate of 4.3%. Overall, it maintains its full-year GDP growth forecast at 5.5%, which is below the government’s target. Pantheon Macroeconomics also retains its 5.5% GDP growth forecast for the Philippines this year.
The think tank highlights that support for growth is diminishing, citing the ceiling on debt growth and evaporating remittance growth. Outstanding loans by big banks grew by 9.7% to P10.86 trillion in April, but credit card debt growth is plateauing around the 30% mark. Remittance growth may also slow down this year.
Revision of Nomura’s Inflation Forecast:
In terms of inflation, Nomura has revised its full-year forecast to 5.3% from the previous estimate of 5.8%. Headline inflation eased to 6.1% in May, bringing the five-month average to 7.5%. The Bangko Sentral ng Pilipinas (BSP) left its policy rate unchanged at 6.25% in May, expecting inflation to average 5.5% this year.
Nomura believes that this marks the end of the BSP’s hiking cycle, with headline inflation expected to return to the target range of 2-4% by September. The BSP had raised interest rates by 425 basis points from May 2022 to March 2023. Nomura further anticipates that the BSP will start cutting its policy rate in March 2024, in line with the expected easing by the US Federal Reserve.
The Fed has raised borrowing costs by 500 basis points since March last year, with the Fed funds rate currently at 5-5.25%. Pantheon Macroeconomics suggests that the BSP should initiate a 50-basis-point interest rate cut in the fourth quarter to support growth. The Monetary Board is scheduled to hold its policy meetings on June 22, August 17, and September 21, with BSP Governor Felipe M. Medalla indicating that rates may be kept on hold.
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