Commuters ride the Light Rail Transit (LRT) Line 1 in Manila in this photo taken on July 30, 2023. — PHILIPPINE STAR/MIGUEL DE GUZMAN

PHILIPPINE economic growth likely picked up in the third quarter amid a recovery in government spending, although elevated inflation and high interest rates may have dampened household consumption, analysts said.

A BusinessWorld poll of 18 economists and analysts last week yielded a median gross domestic product (GDP) growth estimate of 4.9% for the July-September period, a tad faster than the preliminary 4.3% growth recorded in the second quarter.

However, this pace would be slower than 7.7% in the July-September period a year ago.

Analysts’ Q3 2023 GDP estimates

If realized, this would bring the nine-month average GDP expansion to 5.2%, still below the government’s 6%-7% full-year target. 

The Philippine Statistics Authority (PSA) is set to release third-quarter GDP data on Nov. 9.

Analysts said that a recovery in government spending and steady household consumption likely drove the GDP growth in the July-to-September period. However, the pace of economic expansion may have been tempered by persistent inflation and high borrowing costs.

“A catch-up in government spending should have provided some lift to overall GDP. However, household consumption and private investment likely provided much weight, limiting how much the overall figure can be lifted,” Aris Dacanay, Association of Southeast Asian Nations (ASEAN) economist at HSBC Global Research, said in an e-mail.

Nicholas Antonio T. Mapa, senior economist at ING Bank N.V. Manila, gave a 4.2% GDP growth forecast for the third quarter due to the expected “modest rebound” in government spending.

“But capital formation could slide deeper into negative territory. Consumption should still be positive but the weight of elevated prices and rising household debt amidst a high interest rate landscape could be a drag on all important household spending,” Mr. Mapa said in an e-mail.

Latest Treasury data showed state spending rose by 4.12% to P3.82 trillion in the nine months to September from P3.67 trillion a year ago.

“However, growth in public construction may be dampened by weaker activities on the private side given the high interest rate environment,” Domini S. Velasquez, chief economist at China Banking Corp.  said in an e-mail.

The slower-than-expected second-quarter GDP growth was partly attributed to the 7.1% contraction in government spending. Household consumption also grew at a weaker pace of 5.5% during the second quarter from 8.5% a year ago.

On the expenditure side, private consumption historically accounts for about three-fourths (75%) of the Philippine economy, while government spending contributes a little over a tenth.

Pantheon Macroeconomics Chief Emerging Asia economist Miguel Chanco estimated that economic growth further slowed to an annual 3.1% in the third quarter as private consumption deteriorated partly due to unfavorable base effects.

“Moreover, total investment probably will shrink for the first time since the coronavirus disease 2019-hit years, albeit only modestly. Net trade should provide more support to growth, however perversely, as it will be flattered by a pullback in imports, which is statistically growth-positive,” he said in an e-mail.

Mr. Chanco expects government spending to have grown above 2% in the third quarter, reversing the sharp contraction in the previous quarter.

“I expect momentum sequentially, quarter on quarter, to remain fairly weak and subdued, as private consumption continues to struggle with poor balance sheets (inadequate savings, a lot more debt than in recent years),” he said, noting that labor demand is beginning to stagnate, and remittance growth is slowing.

Ms. Velasquez said services likely drove growth on the supply side “with strong gains in transportation, accommodation, food service activities, and arts and recreation.”

“Manufacturing likely saw some increased demand in preparation for the holidays. Meanwhile, we remain pessimistic about agriculture as strong typhoons hit the country in July-August and El Niño continues to pose a risk on production,” she said.

Makoto Tsuchiya, assistant economist at Oxford Economics, said he expects the economy to have expanded by 4.3% in the July-to-September period due to base effects after a sequential decline in the second quarter.

“We expect a statistical bounce-back, but it won’t be a significant improvement given the surrounding macroeconomic conditions. The external demand continues to suffer, although the end of the IT cycle downturn likely lent some support to the electronics exports,” Mr. Tsuchiya said.

Meanwhile, economists warned the Bangko Sentral ng Pilipinas’ (BSP) aggressive policy tightening may hurt GDP growth for the rest of the year.

“The lagged impact of past monetary tightening will continue to constrain domestic demand, particularly weighing on business investment. These headwinds are likely to intensify towards the end of the year and into 2024,” Mr. Tsuchiya said.

The BSP resumed monetary tightening in an off-cycle 25-basis-point (bp) rate hike in October, bringing the policy rate to a new 16-year high of 6.5%. Since May 2022, the central bank has hiked rates by a cumulative 450 bps.

This as headline inflation quickened for a second straight month to 6.1% in September. Inflation averaged 6.6% from January to September, still above the BSP’s 5.8% forecast for 2023.

“Clouds are darkening above Philippine’s 2023 outlook. For starters, households will struggle as inflation remains above the BSP’s 2-4% target rate and interest rate stays high through the rest of 2023. That broad weakness in demand will also cap private investment,” Moody’s Analytics economist Sarah Tan said in an e-mail.

Ms. Tan said she expects government spending to improve in the last quarter, and net exports to see modest gains. The Philippine economy will likely expand 5.2% in 2023, slower than the 7.6% print in 2022 but “will once again outperform its regional peers this year,” she added.

Ms. Velasquez said increased activities during the holiday season will likely provide support to the economy.

“The fourth quarter and full-year growth will still likely fall short of the government’s 6-7% target. Our full-year growth forecast for 2023 is around 5.2%. We think the economy will fare better in 2024 as inflation and interest rates go down,” she said. — Lourdes O. Pilar