Economy to further weaken in Q2 -- FMIC, UA&P

At a glance

  • First Metro Investment Corp. (FMIC) and the University of Asia and the Pacific (UA&P) expect a mild economic slowdown in the second quarter by around 0.5 percentage point or slightly below six percent.

  • FMIC and UA&P say the elevated inflation rate eats into consumer purchasing power.

  • The country's economy expanded by 6.4 percent from January to March.

The Philippine economy would likely slow down further in the second quarter of the year due to high inflation, First Metro Investment Corp. (FMIC) and the University of Asia and the Pacific (UA&P) said in a joint report.

In the May issue of the Market Call released on Tuesday, May 23, FMIC and UA&P said the country’s economic growth, as measured by the gross domestic product (GDP), may fall slightly below six percent in April from June this year.

If realized, the quarter ending June GDP would further weaken from the first three-month growth of 6.4 percent.

“We expect only a mild slowdown in Q2 [second quarter] by around 0.5 percentage point or slightly below six percent year-on-year, as the elevated inflation rate eats in consumers’ purchasing power,” the report by FMIC and UA&P said.

Inflation still remained elevated in the first four months of the year at 7.9 percent, way above the Bangko Sentral ng Pilipinas’ (BSP) target band of 2.0 percent to 4.0 percent. However, it was albeit lower than 8.3 percent at end-March.

“Headline inflation will likely continue to fall averaging 6.3 percent in Q2 [second quarter] when it breaks through the six percent floor by June and we expect this to average 3.3 percent in Q4 [fourth quarter], well within the BSP’s target range,” FMIC and UA&P said.

The economy expanded by 6.4 percent from January to March, beating market expectations, and posted the best performance in Southeast Asia, with only Malaysia's growth at 5.6 percent coming a far second.

FMIC and UA&P said the services sector will continue to lead growth amid the end of the Covid-19 pandemic.

“Major contributors would be the Transportation & Storage, and Accommodation & Food Services sub-sectors, as more Filipinos eat out and revenge tourism (both local and foreign) expands further,” FMIC and UA&P said.

They added that the construction sub-sector under industry should also take pole position in the growth race, driven by major infrastructure works, such as the Metro Manila Subway, North-South Commuter Rail, South Expressway Extension.

“These large contributors to employment and slower inflation should combine to power more robust consumer spending, heretofore hindered by elevated inflation,” FMIC and UA&P said.

On interest rates, FMIC and UA&P said the BSP is expected to keep its policy rates steady at 6.25 percent.

“We think it will have ended its policy rate hiking cycle, unless a major spike in inflation occurs or the exchange rate again rises too fast,” FMIC and UA&P said.

“The peso will [also] remain on depreciation mode especially weighed down by large trade deficits and BSP not going in step with the Fed in the latter’s rate hikes, which we still expect in June,” it added.