The Bangko Sentral ng Pilipinas (BSP) still expects the country’s gross domestic product (GDP) will not expand as much as the targeted six percent to seven percent growth this year and the 6.5 percent to 7.5 percent forecast for 2025 due to the high interest rate environment.
The BSP in a report said domestic GDP growth outlook remains intact over the medium term despite tight financial conditions but still, the economy in 2024 “could settle below the government’s target as higher global crude oil prices and positive real interest rates temper domestic demand.”
For 2025, GDP growth could be better as global prospects also improve. “Growth is seen to pick up in 2025 on stronger net exports amid an improving global growth outlook.”
However, based on the BSP’s May 2024 Monetary Policy Report (MPR), there are deflationary tensions that will affect growth. “The latest estimates of the output gap point to the economy operating slightly below potential, thus suggesting possible deflationary pressures going forward,” said the BSP. Deflation is the opposite of inflation, it is when consumer prices are reduced, resulting in higher purchasing power.
The BSP said the projected impact of the BSP’s policy rate adjustments is likely to peak in the second half this year. It also noted that higher global crude oil prices and positive real interest rates could also affect domestic demand.
But it noted that stronger net exports amid an improving global growth outlook could support GDP growth.
According to the latest Policy Analysis Model for the Philippines (PAMPh) which is the policy model used by the BSP, the output gap “may turn slightly negative in 2024 but will likely close in the latter part of 2025.”
“Domestic economic activity could ease as the effects of previous policy interest rate adjustments and declining real incomes, along with the possibility of tepid global growth, temper aggregate demand. On balance, the latest assessment of the output gap indicates potential deflationary pressures going forward,” said the BSP.
The central bank’s policy rate of 6.5 percent has been unchanged since October 2023. BSP Governor Eli M. Remolona Jr. has already announced that they will likely cut the key interest rate as early as August this year or in the last quarter of 2024, possibly in November or December.
The local economy expanded by 5.7 percent in the first quarter this year, slower than same period last year of 6.4 percent and also lower than the target of six percent to seven percent.
On the demand side, the report said household spending and investments expanded as government spending rebounded. Exports also recovered, signaling some improvement in external demand.
On the production side, the report also noted that services and agriculture sectors expanded, although at a slower pace. Meanwhile, the industry sector grew faster, supported by manufacturing and construction.
“Demand indicators continue to signal expansion,” said the BSP, adding that the manufacturing sector’s preliminary average capacity utilization rate improved to its highest level since 2019. Industries maintained their resources on expectations of improved demand for manufactured goods.
The BSP also noted that the preliminary composite purchasing managers’ index (PMI) in April 2024 was also upbeat. “Looking ahead, business managers anticipate economic conditions to further improve, albeit softer,” said the BSP.