THE economy likely lost momentum in the second quarter as elevated inflation, higher interest rates and softer domestic demand continued to weigh on household spending and business investment.
In its latest Market Call report, the University of Asia and the Pacific (UA&P) forecast gross domestic product growth of 2.6 percent in the April-June period, slipping from the 2.8 percent posted in the first quarter.
“Recent indicators suggest that the Philippine economy is posting early signs of recovery momentum, but the outlook remains constrained by elevated inflation and weaker domestic demand,” UA&P economists said.
Consumption and investment are likely to remain subdued as households and businesses continue to be impacted by higher borrowing costs and rising prices, they added.
The first-quarter growth of 2.8 percent, which has been blamed on the impact of the Middle East war and the lingering effects of last year’s flood control project scandal, has prompted the government to lower this year’s target to just 3.5-4.5 percent from 5.0-6.0 percent.
Still, the UA&P economists said that latest indicators were pointing to a gradual, albeit uneven, recovery.
“Manufacturing activity and industrial output continued to improve alongside a stable labor market, though softer export growth and moderating capital goods imports suggest external demand and investment remain cautious,” they said.
Inflation is expected to remain above target for the rest of the year, which is expected to keep prompting the Bangko Sentral ng Pilipinas (BSP) to continue tightening policy.
It expects the BSP to raise key interest rates by another 50 basis points this year following two 25-basis-point increases, which will bring the policy rate to 5.25 percent by year-end.
While headline inflation eased to 6.8 percent in May from 7.2 percent in April, the UA&P said the improvement was largely driven by lower global oil prices and fuel pump rollbacks following signs of easing tensions in the Middle East.
Underlying inflationary pressures remain elevated, however, with core inflation having accelerated to 4.1 percent from 3.9 percent as second-round effects continued to build.
Inflation also remained high in services-related sectors such as restaurants and accommodation, reflecting the gradual pass-through of higher production costs.
The UA&P also warned that a potential Super El Niño event could further lift food prices in the coming months, adding to inflation risks.
“We see underlying price pressures in tertiary sectors, where inflation pass-through tends to be lagged, along with a looming Super El Niño season threatening to raise food prices,” the economists said.
