A vendor walks under the colorful umbrellas displayed in Sampaloc, Manila. — PHILIPPINE STAR/EDD GUMBAN

THE PHILIPPINE ECONOMY is expected to grow at a slower pace this year, reflecting the high unemployment, rising interest rates, and elevated inflation.

In a report, McKinsey & Co. Philippines said gross domestic product (GDP) may expand by around 5.3% this year, although this is a “moving target.”

This 5.3% GDP forecast is well below the government’s 6-7% target for this year. In 2022, the economy expanded by 7.6%.

First-quarter GDP data will be released on May 11.

“Key challenges face the country: significantly high unemployment numbers; a high inflation rate; rising policy rates; import and export bottlenecks; and the declining strength of the Philippine peso against the American dollar,” McKinsey said in its “What does 2023 hold for the Philippines’ economy?” report.

The report was authored by McKinsey & Co. managing partner Jon Canto, partner Kristine Romano, and knowledge analysts Danice Parel and Vicah Villanueva.

McKinsey said inflation is expected to average 5.1% this year, below the Bangko Sentral ng Pilipinas’ (BSP) average forecast of 6% but faster than the 2-4% target range.

It said the financial services sector will be affected by interest rate hikes and rising inflation.

“Interest rate hikes could have a positive effect by widening the net-interest margin, but macrovolatility could cause a slowdown in new loans. Rising inflation will likely increase the pressure on wages and increase operational cost,” it said.

The BSP on Thursday raised its key interest rate by 25 basis points (bps), bringing the benchmark rate to a 16-year high of 6.25%.

High interest rates will also hurt the real estate and construction sector, affecting its post-pandemic recovery.

“Policy rates may reach 6.25% in the first half of 2023, which would negatively impact home lending rates and increase the strain on a sector that must also address the increased costs of construction and logistics caused by supply-chain issues,” McKinsey said.

On the other hand, McKinsey said there are opportunities for real estate investments and green buildings.

“Much of the sector is expected to recover to pre-pandemic levels by the end of 2023, and construction by the end of 2024. Much of this growth will likely be driven by residential building construction, predicted to grow by 12%. Non-residential construction, by contrast, has yet to recover to pre-pandemic levels,” it added.

Meanwhile, McKinsey said it expects the travel and hospitality sector to return to pre-pandemic levels by 2024.

“High inflation, for example, has increased airlines’ operating expenses. The weakening peso, by contrast, could have a positive effect by encouraging locals to travel and spend within the country rather than abroad. In fact, local air travel is already on the rise and is expected to reach pre-COVID-19 levels in the second half of 2023,” it added.

The energy sector is also expected to expand this year, McKinsey said.

“Growth in the Philippines’ energy sector contracted to 4.8% in 2022 and is expected to rebound to 5.5% in 2023. However, the sector needs to ensure that this growth target can be met given looming supply constraints and while accelerating the transition to green energy,” it added.

The energy sector still faces risks such as a potential supply shortage in the next few years, rising oil and gas prices, supply-chain disruptions, and currency depreciation.

Also, the healthcare sector may slow down this year despite growing demand.

“Growth stalled in 2022 (3.9% and 8.25% for healthcare services and pharmaceuticals respectively), and this trend is expected to continue in 2023,” McKinsey said.

McKinsey noted inflation will drive up costs for service providers and manufacturers, while supply chain problems will cause production and medicine prices to rise.

“Turnover levels for health workers are expected to remain high, straining the capacity of service providers and potentially resulting in a poor quality of healthcare,” it added. — Luisa Maria Jacinta C. Jocson