London-based think tank Capital Economics warned that the strong gross domestic product (GDP) growth seen in the third quarter is unlikely to be sustained amid weak economic momentum, slowing remittances and exports, and tighter fiscal policies.
"GDP growth in the Philippines accelerated in the third quarter, but this strength is unlikely to last," said Gareth Leather, senior Asia economist at Capital Economics, in the think tank's Asian economic outlook report published on Friday, Dec.13.
Last month, the Philippine Statistics Authority (PSA) reported that the local economy grew by 5.2 percent in the third quarter, down from 6.4 percent in the second quarter. This growth rate is the slowest since the second quarter of 2023, which recorded a 4.3 percent increase. This brought growth for the first three quarters of 2024 to 5.8 percent, below the government's initial six to seven percent target, prompting a recent revision to a less ambitious target of six to 6.5 percent.
Growth slowdown
Capital Economics anticipates that the country's economy will continue to weaken. Coupled with a continued low inflation rate, they expect the central bank to further lower its interest rates.
"Admittedly, consumption is likely to be boosted by the drop in inflation and further cuts to interest rates, but we doubt the pace of consumption growth seen in Q3 [third quarter] is sustainable," Leather said.
He stated that inflation would stay low within the central bank's target range, supported by weaker economic growth and declining food prices.
Leather also expects a slowdown in remittance growth, which made up nearly 10 percent of the country's GDP in 2023. He has similar expectations for exports, mainly due to weaker global economic conditions.
Additionally, tighter fiscal policy, aimed at reducing the budget deficit that increased sharply during the pandemic, will also slow economic growth.
Therefore, Leather predicts a 25-basis-point reduction in the key policy rates during the Monetary Board (MB) meeting on December 19th. The think tank's forecast for 2025 is below-consensus GDP growth of 5.8 percent. The Marcos administration's economic team recently revised its growth target for 2025 until 2026 to a wider six to eight percent, citing both domestic and global uncertainties.
"With growth set to moderate and inflation likely to remain low, we expect a further 100 bp [basis points] of cuts in 2025," Leather projected.
If the MB reduces the key policy rate by 25 bps during its meeting, continued easing would bring the borrowing cost to 4.75 percent at the end of 2025.