Economic recovery on track despite slower Q2

THE PHILIPPINE economy will continue to recover “rapidly” this year, although the pace of expansion likely slowed in the second quarter, economists at First Metro Investment Corp. (FMIC) and the University of Asia and the Pacific (UA&P) said.

“The country’s economic recovery should remain on track, despite likely slight easing starting Q2. More robust economic data — higher employment, (National Government) spending and capital goods imports — as well as firm growth in exports and OFW (overseas Filipino workers) remittances should provide the impetus,” the economists said in their July report of The Market Call.

Despite slower growth in the second quarter, FMIC and UA&P economists said Philippine gross domestic product (GDP) will still expand by 6-7% this year. This is slightly lower than the 6.5-7.5% GDP target set by economic managers for 2022.

The Philippine Statistics Authority (PSA) will release second-quarter GDP data on Aug. 9. In the first quarter, GDP expanded by 8.3%.

“The outlook for continuing fast economic recovery for H2 still looks reassuring as the economy added nearly half a million jobs in May (esp. trade, construction and manufacturing) and consumer sentiment improved,” the economists said.

They said the jobs market remained strong even after the election campaign season ended. While the jobless rate in May reached 6%, higher than 5.7% in April, they said this was mainly due to the rise in labor participation rate to 64% from 63.4% in April.

Cash remittances rose by 1.8% to $2.43 billion in May, bringing the five-month total 2.5% higher to $12.59 billion.

“We expect infrastructure spending to accelerate in (the second half) as the National Government fiscal space has expanded with better tax revenues,” FMIC and UA&P economists said.

In the five months to May, infrastructure and capital outlays spending reached P334.6 billion, up by 0.7% year on year.

INFLATION YET TO PEAK
At the same time, FMIC and UA&P lowered their inflation forecast to 5-5.2% this year, from 5.5% previously.

The projection comes after inflation hit 6.1% in June due to rising prices of oil, food and other commodities. This was the third consecutive month inflation breached the Bangko Sentral ng Pilipinas’ (BSP) 2-4% target band.

Year-to-date headline inflation reached 4.4% as of end-June, but still below the BSP’s 5% full-year projection.

“Crude oil prices appeared to peak in early June near the $120-per-barrel level as it trended downward thereafter. By mid-July it had fallen below $100 per barrel and may only have monetary upswings as the global economic slowdown cools demand. Thus, we may see the peak of local inflation in the third quarter,” the FMIC and UA&P economists said.

The Philippine Statistics Authority will release July inflation data on Friday.

Weak consumer spending due to high inflation may be offset by the positive income impact of the peso depreciation on OFW remittances, business processing outsourcing revenues, and exports.

“We see the peso depreciation to boost income of some 70 million Filipinos and offset likely softer consumer spending due to the elevated inflation,” the economists said.

The peso depreciated by 2.3% to P53.57 against the dollar in June, which was the biggest drop among its peers in Asia. It further weakened beyond the P56-level against the US dollar in July.

“The policy rate hike by the BSP did little to peso as other global central banks tightened more aggressively. The swift downfall roused the BSP to consider a larger rate hike in the next policy meeting which it did, with a 75-basis-point policy rate hike on July 14th,” FMIC and UA&P said.

“The peso will likely recover a little due to recent US dollar softening and likely lower crude oil prices for the rest of the year.” — Diego Gabriel C. Robles