Recovery in consumption seen to fuel PHL growth

A recovery in household consumption could drive Philippine gross domestic product (GDP) growth to the 6% range this year, HSBC Global Research said.

“We think household consumption in the Philippines should return, bit by bit, to its regular levels, bringing overall gross domestic product growth back to the range of 6% or more,” HSBC economist for ASEAN Aris D. Dacanay said in a report.

The Philippines’ GDP expanded by 5.2% in the third quarter, its weakest growth in five quarters. This brought the nine-month growth average to 5.8%.

The government is targeting 6-6.5% growth for 2024 and 6-8% for 2025 to 2026.

“Consumption should also be boosted over the near term with the recent depreciation in the Philippine peso against the US dollar boosting the purchasing power of every US dollar remitted.”

HSBC also cited a stronger recovery in non-durable consumer goods.

“Non-durable spending may be improving fast, but spending on big-ticket items, such as cars and real estate, will need more time to return to normal.”

“These goods are large expenditures by nature, potentially requiring households to acquire credit. To optimize one’s borrowing costs, households may be waiting for the central bank’s easing cycle to end before eventually deciding whether to borrow money or not.”

Mr. Dacanay said household consumption is unlikely to be affected by the Trump administration’s aggressive tariff policy.

“Remittances, demographics, and services exports — three sectors of the economy that drive consumption — are subject to minimal tariff risks, at best. So, to monitor the Philippine economy in 2025, watching household consumption will be key,” he said.

“The economy does have some layer of insulation; household consumption remains the country’s main growth driver, and no other economy can put a tariff on consumption.”

Markets are pricing in the impact of US President Donald J. Trump’s aggressive tariff proposals. He has pledged to impose tariffs of up to 60% on China, 25% on Canada and Mexico as well as a 10% universal tariff.

Mr. Trump also said he planned to slap tariffs on imported computer chips, pharmaceuticals and steel as part of efforts to encourage manufacturers to make these products in the US.

“With all the headlines on trade and tariffs, there is a sense of relief that the Philippines is the least affected in ASEAN (Association of Southeast Asian Nations),” Mr. Dacanay added.

HSBC noted that household consumption has slowed amid elevated inflation and interest rates, which dampened purchasing power.

Private consumption grew by 5.2% in the third quarter of 2024, improving from 4.7% in the second quarter.

“But all this is already behind us. Inflation is back to within the central bank’s 2-4% target band, while monetary policy is amidst its gradual easing cycle,” Mr. Dacanay said.

Headline inflation averaged 3.2% in 2024. The BSP also expects inflation to remain within the 2-4% target band from this year to the next, as its baseline projections are at 3.3% and 3.5% for 2025 and 2026, respectively.

The central bank began its rate-cutting cycle in August last year, delivering a total of 75 basis points (bps) worth of cuts as of end-2024. This brought the key rate to 5.75%.

The BSP has signaled further rate cuts this year.

HSBC expects the central bank to bring down the benchmark rate to 5% by the third quarter of 2025.

Source: Business World

Philippines may escape ‘middle-income trap’ by 2050

It may take more than two decades before the Philippines can escape the “middle-income trap,” Nomura Global Markets Research said, citing the need to implement key reforms to boost investment-led growth.

“The countries that continue to reap the benefits of the demographic dividend include Vietnam, Indonesia and the Philippines, and all have brighter prospects than Thailand on breaking free of the trap,” it said in a report.

“However, this is still a long-term challenge. Assuming strong potential growth is sustained (i.e., 5% for Indonesia and 6% for the Philippines and Vietnam), these countries may escape the trap by 2050.”

The Philippines remained a lower middle-income country despite an increase in its gross national income (GNI) per capita to $4,230 in 2023 from $3,950 in 2022, according to the World Bank’s latest income classification data.

To become an upper middle-income country, the Philippines would need a GNI per capita of $4,516 to $14,005.

The Philippines has been stuck in the lower middle-income bracket since 1987, according to the latest available data.

In its report, Nomura created a Middle-Income Trap Escape Index (MITEI), which assesses the ability of countries to break free from the middle-income trap.

Countries are ranked on a scale where a score of 100 is the sample average, with anything higher or lower than 100 indicating an above or below average score, respectively.

The Philippines garnered a score of 85 under the MITEI Index, the lowest among Southeast Asia. It scored lower than Malaysia (103), Thailand (98), Vietnam (94) and Indonesia (87).

Nomura said the Philippines is considered in a “tight spot,” which is defined as “traditionally poorer countries that continue to trail middle-income league tables.”

“Vietnam, Indonesia and the Philippines are catching up fast, propelled by strong investment growth, but breaking free of the trap is a long-term challenge.”

There is a need to implement structural reforms to drive investment growth through infusion and innovation, it added.

The Marcos administration is targeting to reach upper middle-income status by this year. The World Bank usually releases the income classification data in July.

Nomura said “business-as-usual” growth is not enough to escape the middle-income trap.

“In the Philippines, the government’s continued push for infrastructure investment will be supportive of medium-term growth,” it said.

The government is targeting 6-8% economic growth from this year until 2028. It has also committed 5-6% of gross domestic product on infrastructure annually.

However, Nomura noted that increased geopolitical tensions, particularly between the Philippines and China, could hinder foreign direct investment from entering the country.

“The underperformance during the latest supply-chain reconfiguration could therefore limit the boost to investment relative to peers,” it added.

Nomura said the process of graduating to a higher income class will be a long and challenging process.

“To escape the middle-income trap, a country cannot continue to rely on cheap labor and rapid urbanization. The move from investment-led growth to innovation-led growth, however, is complicated,” it said.

“It needs the combination of policies to attract and adopt foreign technologies, an adequately skilled workforce, increases in human capital and more deep-rooted reforms of the economic and business climate.”

Adapting technological innovations such as generative artificial intelligence will also be critical, it added

Source: Business World

Stronger 2025 growth expected

Robust household spending, low unemployment and election-related economic activity are expected to bolster the country's economic growth, potentially hitting the official target.

Bank of the Philippine Islands (BPI) expects a 6.3-percent economic expansion for 2025, with household consumption remaining its biggest driver.

The government is aiming for 6.0- to 8.0-percent annual growth this year, wider than the 6.0 to 6.5 percent for 2024 that most analysts expect to have been missed.

"The factors sustaining consumption over the past decade, such as remittance inflows, have remained in place despite the economic slowdown in major economies," BPI lead economist Emilio Neri said.

"With aging populations abroad driving the demand for labor, the impact of headwinds on remittances like trade barriers and anti-immigration sentiment will likely be limited," he added.

Low unemployment, particularly in the services sector, is also expected to sustain household income growth and expand the middle class.

While concerns about job displacement due to artificial intelligence (AI) persist, Neri said there would be minimal disruption as adoption of the technology remained in its infancy.

AI, he added, could potentially enhance labor productivity for companies that leverage the technology effectively.

Meanwhile, "the economy also stands to benefit from the recent reduction in interest rates and provision of additional liquidity through the reserve requirement ratio."

"Private sector spending in construction activities has not yet returned to pre-pandemic levels, but lower interest rates may fast track its recovery," Neri said.

The Bangko Sentral ng Pilipinas (BSP), which lowered its policy rate by 75 basis points (bps) to 5.75 percent last year, was forecast to cut by 50 bps this year.

The central bank was earlier expected to cut by as much as 100 bps amid a favorable inflation outlook, but concerns over protectionist threats made by US President-elect Donald Trump have prompted analysts to revise their outlooks.

Neri said that global uncertainties, particularly the policy direction of the US Federal Reserve (Fed) under a second Trump administration, could influence the peso's performance and limit the extent of monetary easing.

"Rate cuts in the first half of the year appear feasible, but the latter half may bring challenges as the Federal Reserve could shift its policy stance in response to President Trump's policies," he said.

Neri added that "depreciation pressure on the peso may persist as markets continue to assess the potential impact of Republican policies on inflation and monetary policy."

The Fed's anticipated 50-bp rate cut this year, contingent on US economic data, could also play a role in shaping currency trends.

Source: Manila Times