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Weak consumption likely to persist

Consumer spending is likely to remain weak as many still avoid going out due to the high number of coronavirus cases. — PHOTO BY CATHY ROSE A. GARCIA

By Beatrice M. Laforga, Reporter

CONSUMER SPENDING will likely remain muted this year as pent-up demand may not deliver the much-needed boost to the Philippine economy amid continued lockdown restrictions, ANZ Research said.

In its latest Asia Economic Outlook, ANZ Research estimated household consumption will only pick up by 1.4% this year, a turnaround from the 7.9% drop in 2020, but still far from the pre-pandemic growth of 5.9% in 2019.

“Strains from prolonged mobility restrictions are becoming evident in household and corporate behavior, impacting consumers’ desire to spend. Any rebound in pent-up demand could be thus smaller than expected, weighing on longer-term growth prospects,” it said.

Private consumption is a major growth driver for the economy contributing around three-fourths of gross domestic product (GDP) each year.

Unless consumer spending “regains its pre-pandemic strength,” ANZ Research said outlook for the Philippines will remain “somber.” The research firm is only seeing economic output to return to its pre-crisis level by the second half of 2022.

The Philippines continues to report high numbers of coronavirus disease 2019 (COVID-19) cases, although granular lockdowns are now implemented to curb the spread.

The unemployment rate stood at 7.7% in July, with many households dipping into their savings to stay afloat.

“Viewed together with weak bank lending and tighter credit standards, the magnitude of any anticipated pent-up demand that may unleash when the economy reopens is likely to have dwindled,” it said.

Bank lending continued to decline in July, falling by 0.7% year on year, marking eight consecutive months of decline.

Even with muted household spending, ANZ Research maintained its 4.2% growth forecast for the year, which is the low end of the government’s 4-5% target.

Persistent weakness in demand will also help inflation ease to 4% by year’s end, it added. This is still within the 2-4% target of the central bank.

This was echoed by Nicholas Antonio T. Mapa, senior economist at ING Bank N.V. Manila, who projected a modest 2.1% uptick in consumption for the entire year on grim labor market, high inflation and a less upbeat spending outlook based on the latest survey by the central bank.

“Household savings have been on the decline, indicating that most households have struggled to keep up with necessary expenses and may have had to draw down on savings or set aside less for savings. Lower savings will impair households’ propensity to make big-ticket investments all the more should interest rates be forced unceremoniously higher,” he said in an e-mailed response on Wednesday.

Mr. Mapa is projecting a slower 3.7% GDP expansion this year even as the Bangko Sentral ng Pilipinas (BSP) keeps policy rates at a record low to encourage bank lending.

“If BSP will be forced to withdraw this stimulus, we could see households and SMEs (small- and medium-sized enterprises) struggle further as they once more face the double challenge of navigating an environment of higher prices and rising borrowing costs,” Mr. Mapa added.

Government spending, which accounts for 20% of GDP, will likely pick up the slack as it is projected to rise by 8.7% this year, albeit slower than last year’s 10.5% rise, ANZ Research said.

“Fiscal policy will continue to play an important role in supporting economic recovery. A third stimulus package, on which the decision is yet to be reached, will be crucial. While it will entail a larger budget deficit, some respite from higher revenues is also expected,” it said.

Investments will likely expand by 16.4% this year, from the 34.4% drop in 2020, while exports and imports are both expected to grow by 6.4% and 10.4%, respectively.

For next year, ANZ Research is seeing household consumption to pick up at 6.1% as the COVID-19 threat subsides.

This is expected to drive Philippine GDP to a 6.2% growth in 2022, before slightly slowing down again in 2023 to 6%. Economic managers kept the 2022 growth goal at 7-9%.

To support the economy’s recovery, the research firm said the BSP will likely keep its key policy rates at its current record low of 2% until next year, before it delivers two rounds of rate hikes in March and September of 2023.

“We know from history how detrimental rate hikes can be with the 2018 super rate hike cycle of BSP all but knocking down 2019 GDP to its lowest reading in 4 years then,” Mr. Mapa said.