Philippine economy faces slowdown amid mounting headwinds – ING

Following a stronger-than-anticipated 6.4 percent gross domestic product (GDP) growth in the first quarter, the Philippine economy is now bracing for a slowdown as it faces various headwinds that may impede expansion from the second quarter onward.

In a report titled “Momentum slows in the Philippines as headwinds mount,” ING’s senior economist for the Philippines, Nicholas Mapa, outlined key reasons supporting his projection of a more moderate 5.6 percent growth rate in the second quarter, indicating less optimistic prospects for the nation’s economic landscape.

Mapa has projected a decline in the Philippines’ full-year GDP growth to 5.5 percent this year from the robust 7.6 percent recorded in 2022, as the effects of the pandemic-induced low base subside.

He highlighted concerns about the first-quarter growth, which stood at 1.1 percent, the slowest expansion pace since 2011 and below the 1.9 percent quarter-on-quarter average growth outside the COVID-19 recovery period.

Mapa suggested that this could be an early indication of a pullback from the “revenge spending” observed after the lifting of lockdowns, as households return to more normal savings and spending patterns.

ING also pointed out “worrying trends” in importation, reflecting on domestic consumption and manufacturing output. Year-to-date, imports have declined by 6.6 percent, with all sectors except consumer imports experiencing contraction.

Capital goods and raw materials, crucial leading indicators of future growth, have seen declines of 5.8 percent and 13.7 percent year-to-date, respectively.

This prolonged negative growth in imports, including machinery, aircraft, office machinery, semi-processed raw materials, and unprocessed raw materials, suggests potential constraints on economic output.

Mama also pointed out that a high policy interest rate of 6.25 percent to combat surging inflation has resulted in fewer businesses and consumers borrowing money for economic activities.

The recent single-digit growth rates in monthly bank loans reported by the BSP indicate a slowdown in lending, which contrasts with the narrative of an economy accelerating for faster growth.

While this is a positive development on the inflation front, it carries negative implications for future growth.

While robust car sales have been observed, ING raised concerns about the affordability of financing among buyers, which might limit their spending on other purchases in the future.

Although motor vehicle loans have recently expanded, it took almost two years after the rebound in vehicle sales, leading ING to question how vehicles are being purchased if not through bank loans.

External economic challenges are also adding to the Philippines’ woes. ING warned that the country would face additional headwinds from the global trade slump and struggles experienced by major trading partners apart from the United States.

While the export sector’s contribution to overall growth is modest, a slowdown in China could result in reduced demand for Philippine exports and limit potential tourist arrivals from the mainland to the Philippines.