World Bank cuts PH growth forecast from 6% to 5.6% in 2023

The World Bank has downgraded its Philippine gross domestic product (GDP) growth outlook to 5.6 percent this year from its previous estimate of six percent amid slowing global growth and tighter financial conditions.

World Bank chief economist Aaditya Mattoo for East Asia and Pacific in a press briefing Monday, Oct. 2, said the services sector remains a key growth driver for the country and his report highlighted its prospects and impact on the revival of the manufacturing sector.

The 5.6 percent GDP growth forecast for the Philippines is actually the World Bank’s original estimate based on its April 2023 East Asia and Pacific Economic Update. In June this year, the multilateral organization revised its projection higher to six percent based on the current developments at the time, underpinned by strong domestic demand, consumer spending and remittances.

What also changed between the April and October Economic Update is the 2024 GDP growth estimate which is now downgraded from 5.9 percent to 5.8 percent in the latest forecast.

The big concern is slowing global growth, said Mattoo. “The Philippines like all the countries in the region depends on the rest of the world for its (growth) and especially services (and remittances). All those factors are tied to the state of the global economy. So, our projection reflects the fact that global growth has slowed down and financial conditions have become tightened (but) they are expected to ease in the future,” he said.

The good news for the Philippines, he added, “is that we expect economic activity as supported by domestic demand, to be led by consumption and decelerating inflation (in the medium term).”

Meanwhile, the updated World Bank projection is lower than the government’s six percent to seven percent forecast for 2023. For the first six months, the country’s GDP grew only by 5.3 percent, pulled down by a lower second quarter or April to June growth of 4.3 percent versus 6.3 percent in the first three months. To ensure GDP will settle within the government growth forecast for 2023, the administration is implementing catch-up spending plans and expediting programs and projects for the rest of the year.

Mattoo said that in the region, China and Vietnam stands out but even countries such as the Philippines, Cambodia and Malaysia have output that is as much as 10 percent higher than pre-pandemic levels.

“The region has continued to grow but growth has recently slowed down,” he told reporters.

Growth in developing East Asia and Pacific is expected to grow by five percent this year but will slowdown in the second half. Next year, regional growth is estimated to improve to 4.5 percent.

Among 23 economies in East Asia and Pacific, the World Bank noted that the Philippines’ 5.6 percent growth estimate for 2023 is the second highest after Samoa’s 6.2 percent. Cambodian economy is projected to grow by 5.5 percent, China and Mangolia at 5.1 percent both, and Indonesia at five percent.

For 2024, the World Bank said that despite China’s economic woes such as elevated debt and property sector weakness and other structural factors, the regional economy will still grow amid improving external conditions.

Besides China’s “persistent domestic difficulties” other downside risks to the region are “intensification of geopolitical tensions, and the possibility of natural disasters, including extreme weather events.”

Mattoo said basically, they have identified three concerns affecting global and regional growth, but also sees one opportunity.

The three concerns are: increased indebtedness as both government and private debt have risen across the region; China slowdown on account of the reduced consumer confidence and uncertain policies that are hurting investments in specific sectors such as infrastructure; and the trade and industrial policies.

As for the “big” opportunity, this is the chance to harness “the digital revolution through reform” since services have a growing role in the East Asia and Pacific economies.

Mattoo said services now account for at least about half of employment and value-added in most economies and contributing more than manufacturing to labor productivity. In addition, exports and foreign direct investments have grown faster in services than in manufacturing.

Mattoo emphasized that for some countries – and he cited the Philippines as an example – high growth may be sustained in the medium term if the governments will unlock the job-creating potential of the services sector.

The services sectors have “an increasing role in driving development in a region known for manufacturing-led growth”.

In the Philippines, Mattoo noted that services policy reforms “combined with the digital revolution are increasing productivity and changing the nature of jobs in a range of services (such as in) communication, finance, transport and business services.”

These improvement in services are also being passed on to other sectors such as agriculture and manufacturing which used these services to increase productivity, he said.

“Services for development (are creating) the virtuous cycle of opportunity and capacity,” Mattoo added. “In the case of the Philippines, use of digital technologies is associated with higher levels of productivity,” he also said, especially for foreign-owned companies and other firms that have accessed to fibre broadband.

The World Bank reported that services sectors “have already become key contributors to aggregate labor productivity growth over the last decade” and that it has grown faster than goods exports. “And the growth of foreign direct investment in services has exceeded that in manufacturing by a factor of five in China, Indonesia, Malaysia, the Philippines, and Thailand,” it added.

The World Bank said that in the Philippines, productivity increased by 1.5 percent from 2010 to 2019 when companies adopted software and data analytics.

In the report, “Services for development”, part of the October 2023 Economic Update for the region, it noted that “new firm level evidence from the Philippines suggests that the average services firm has about a third more data and software assets per worker than their manufacturing counterpart, though the adoption of digital technologies varies across services sectors.”

“Digital technology adoption is stronger for firms with access to broadband, as well as for foreign-owned firms. And, the adoption of digital technologies is associated with higher productivity and value-added within firms,” said the World Bank.