New Delhi : Driven by the release of pent-up demand from consumers, the Philippine economy is projected to surge to a 7.2% growth in 2022 before tapering off to an average of 5.7% percent growth in 2023, according to the Philippines Economic Update (PEU) released today by the World Bank.
This year’s forecast rides on the momentum of a 7.7 percent growth in the first three quarters of 2022, buoyed by the removal of remaining restrictions on people’s mobility and business operations and the recovery of incomes and jobs. The reopening has benefitted the services sector, and government spending on infrastructure fueled the growth of construction and industry.
The forecast for 2023 is premised on reduced consumer demand, alongside high inflation and high interest rates that are expected to temper household spending and investments.
Higher interest rates will likely constrain growth of private lending and investments at a time when public spending will likely slow as the country undertakes “fiscal consolidation” or implements measures to rein in government deficits and reduce debt. Also, as global growth is expected to decelerate next year, external demand from advanced economies, which are key buyers of Philippines merchandise exports, will be subdued.
Ndiamé Diop, World Bank Country Director for Brunei, Malaysia, Philippines, and Thailand said that given these developments, it remains important to sustain the country’s investments in health and education to reduce vulnerabilities from the scarring impact of the pandemic especially among the poor and most vulnerable.
“Shocks from the COVID-19 pandemic have worsened child malnutrition and stunting and hampered student learning especially among the poor and most vulnerable families,” said Diop. “If unmitigated, these shocks can have persistent impacts on people’s wellbeing and damage their future productivity, earnings, and capacities for innovation. For this reason, sustained investments in agriculture, nutrition and education are imperative despite pressure for fiscal consolidation.”
The report says the immediate domestic challenge that faces the country is high domestic inflation, averaging 5.4 percent in the last ten months, and reaching 7.7% in October.
Inflationary pressure comes from multiple fronts including elevated global commodity and energy prices, disruptions in international supply chain and logistics, depreciation of the peso and domestic supply constraints due to low farm productivity and recent floods and typhoons.
“High inflation tends to inflict the greatest harm on low-income households where inflation often outpaces wage growth, which these households rely on,” said Ralph van Doorn, World Bank Senior Economist. “Besides managing the interest rate, addressing inflation entails employing various measures including freer trade, lower tariffs and non-tariff barriers to help augment domestic supplies as needed and support to agriculture production through extension services, seeds, fertilizers.”
Over the medium term, addressing the weaknesses in the agriculture sector will strengthen food security in the country. Growth prospects for the agriculture sector remain poor due to a combination of chronic underinvestment and intense vulnerability to weather-related shocks.
Agriculture comprised less than 10 percent of the country’s gross domestic product (GDP), and the sector’s contribution to growth is minimal during the past five years. However, it employs over 22 percent of the labor force, and domestic food production influences trends in inflation.
Increasing agricultural productivity, the PEU highlights, will be crucial to help ensure food security and boost more inclusive growth. To this end, efficient use of public funds for public investments will help address the structural constraints including value chain weaknesses and poor business climate for the agri-food system.
To strengthen private sector confidence, the economic update says the administration needs to take decisive action to confirm its development priorities. The new administration has laid out its eight-point socio-economic agenda, which aims to bring the economy back to its high-growth trajectory. The completion of the Philippines Development Plan 2023-2028 is important to provide the country a clear roadmap for achieving its medium-term priorities.