The International Monetary Fund (IMF) has raised its gross domestic product (GDP) growth forecast for the Philippines to 6.7 percent from the previous 6.5 percent as the economy resume near normal activities, according to IMF Resident Representative, Ragnar Gudmundsson.
For next year, however, Gudmundsson said the IMF has significantly cut down growth projection to five percent versus its previous forecast of 6.3 percent due to the lingering impact of the Ukraine war and the global monetary policy tightening to fight off rising inflation as a result of the geopolitical conflict.
“Our GDP growth projection for 2022 has been revised upwards to 6.7 percent, reflecting the reopening of the Philippine economy and the strong recovery momentum in the first half of the year,” Gudmundsson said in an email.
“However, because of the war in Ukraine, a slowdown in major trading partners, faster monetary policy tightening in the US, and high inflation, we expect the growth momentum to moderate in the second half of 2022 and in 2023,” he added.
IMF’s 2022 growth forecast is within the government’s revised 6.5 percent to 7.5 percent range while next year’s five percent projection is way below the 2023 to 2025 growth assumptions of 6.5 percent to eight percent announced last July 8 by the inter-agency Development Budget Coordinating Committee.
As for inflation and the Bangko Sentral ng Pilipinas’ (BSP) monetary policy stance, Gudmundsson said inflation is likely to hit 5.1 percent on the average for 2022, higher than BSP’s average forecast of five percent. For the first six months, inflation averaged at 4.4 percent, above the two percent to four percent government target.
The IMF official said the BSP’s Monetary Board has the leeway to adjust benchmark rates higher or above the current 3.25 percent interest rates with inflation expected to remain on the high side.
Increasing the BSP policy rate further to ensure inflation expectations stay controlled will not likely derail the growth momentum, he also said. This is despite that the BSP expects inflation will remain above-target in 2023 at 4.2 percent and will only fall below four percent in 2024.
“With inflation in the first half of the year running at 4.4 percent and projected to reach 5.1 percent for 2022, the BSP still has room to further raise its policy rate without undermining growth prospects. What matters is that the BSP’s policy decisions remain data driven and ensure that inflation expectations continue to be well anchored,” according to Gudmundsson.
The IMF on Tuesday, July 26, released an update on its April World Economic Outlook (WEO) with a 3.2 percent global growth projection for 2022 versus 6.1 percent in 2021. This is lower by 0.4 percentage point compared to its April forecast. In 2023, the IMF said “disinflationary monetary policy is expected to bite” and global output will only grow by 2.9 percent, 0.7 percentage point lower from the previous forecast.
For the ASEAN-5 region, which includes the Philippines, the IMF retained the 2022 GDP forecast of 5.3 percent but for 2023, it has downgraded its outlook by 0.8 percentage point to 5.1 percent.
The IMF also revised global inflation forecast higher to 6.6 percent in advanced economies and 9.5 percent in emerging market and developing economies, up by 0.9 and 0.8 percentage points from its April numbers, respectively, due to persistent supply-side demand and elevated food and energy prices.
“With increasing prices continuing to squeeze living standards worldwide, taming inflation should be the first priority for policymakers. Tighter monetary policy will inevitably have real economic costs, but delay will only exacerbate them,” noted the IMF. It said targeted fiscal support will cushion the impact on vulnerable economies -- “but with government budgets stretched by the pandemic and the need for a disinflationary overall macroeconomic policy stance, such policies will need to be offset by increased taxes or lower government spending.”
In its April WEO report, the IMF said the Russia-Ukraine war, which has triggered a costly humanitarian crisis, happened when the global economy was still mending from the Covid-19 pandemic, resulting to a set back to global growth momentum.
The IMF noted that the economic costs of the war will spread across the world in terms of commodity markets, trade, and financial interlinkages. Fuel and food price rises are already having a global impact, with vulnerable populations—particularly in low-income countries—most affected, it said.
In the July WEO update, the IMF besides the Ukraine war, the frequent and wider-ranging lockdowns in China have also slowed activity and created new bottlenecks in global supply chains.
“Inflation remains stubbornly high,” noted IMF. Most economies anticipate inflation to return to near pre-pandemic levels by end-2024 but more supply-related shocks to food and energy prices from the war “could sharply increase headline inflation and pass through to core inflation, triggering a further tightening in monetary policy.”
“Such shocks could, if sufficiently severe, cause a combination of recession accompanied by high and rising inflation (“stagflation”), although this is not part of the baseline scenario,” said the IMF. While major central banks have raised interest rates in respond to high inflation, the IMF said the “exact amount of policy tightening required to lower inflation without inducing a recession is difficult to ascertain.”