NextGen Day

The domestic economy is expected to grow by 6.3 percent this year and 6.5 percent the next year, according to the Ayala-led Bank of the Philippine Islands (BPI), which expects expenditure to climb as inflation continues to decline.

Discretionary expenditure is currently anticipated to rise as the rate of price hikes continues to exhibit slower growth, according to a virtual briefing given by BPI Chief Economist Jun Neri on Friday.

“The reason for our optimism is that consumers would now consider discretionary (non-essential) spending if inflation is going to be slower than initially predicted. They used to avoid it due to the high cost of food, but now that they have started to stabilize, they might start to consider buying more discretionary items,” he said.

BPI’s estimates of domestic economic growth for both years are consistent with the government’s assumptions of 6-7 percent for 2023 and 6.5-8 percent for 2024.

The resilience of the US economy, according to Neri, is another factor contributing to their optimism about domestic output. She noted that the US is one of the Philippines’ main trading partners and that a potential recession there—which is widely anticipated given the developments regarding inflation and banking-related issues, among other things—will affect the Philippines.

The domestic economy outperformed forecasts in the first quarter of this year, growing by 6.4 percent annually.

Despite the economy’s weakest expansion in seven consecutive quarters of excellent growth and recovery from the virus-induced pandemic, officials and analysts claimed this turn-out is still solid. This is true even if inflation rates have been elevated since last year.

The nation’s inflation rate reached a record high of 8.7 percent in January of last year, which was unexpected given that officials had earlier predicted that the rate of price increases would begin to decline after the monthly figure reached 8 percent in December.

Nevertheless, monthly inflation rates have slowed, with the May 2023 level falling to 6.1 percent.

The government’s target range of 2-4 percent was exceeded by the average inflation rate over the first five months of this year, 7.5 percent, and by the full-year average, which the monetary authorities predicted would be 5.4 percent.

Beginning in the last quarter of this year, monthly inflation rates are expected to fall within the target range.

The average inflation forecast for 2024 and 2025 by the Bangko Sentral ng Pilipinas (BSP) is 2.9 percent and 3.2 percent, respectively.

According to Neri, the BSP has greater space to make cuts than the Federal Reserve because inflation has been growing more slowly.

But he added that they must consider the difference in our prices from those in the US.

He emphasized that if the Fed has not lowered the Fed Funds Rate, the BSP “may be forced to either do it gradually or not at all,” even if it has an opportunity to lower its key rates.

Because exports have declined more quickly than imports, he stated, “The major consideration is… again, us having wide current account deficit.”

Even if the gap is higher in the first four months of this year compared to last year, the current account deficit is predicted to be less than last year, according to him.

“I’m hoping that in the second half (of the year), our exports will increase.” He continued that this will enable BSP to have a lower interest rate spread.

Recent changes by the monetary authorities to the country’s balance of payments forecast include a reduction of the projected current account deficit from USD 16.8 billion to USD 15.4 billion.

The expansion of business process outsourcing (BPO) sector revenues and a consistent rise in travel receipts since the country was reopened to foreign tourists, contributed to this in part.

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