MANILA, Philippines - The Philippine economy is expected to remain strong this year despite the slowdown in the first quarter, according to the latest HSBC Global Research.
“The economy slowed more than expected due to output loss from Typhoon Haiyan. Growth, however, was still above trend, reflecting sticky household consumption and gradually rising investment,” HSBC Asian economist Trinh Nguyen said in the research.
Nguyen said with this optimism, the bank is maintaining its 2014 Philippine growth forecast of 5.9 percent, a deceleration from 7.2 percent in 2013.
The Philippines grew 5.7 percent in the first quarter of 2014 coming from a year of major disasters. Despite this, the Philippines ranked as the third fastest growing economy in Asia, after China (7.4 percent) and Malaysia (6.2 percent).
The government believes that the Philippines is on the right path with nine consecutive quarters of above 5.5 percent GDP (grow domestic product) growth, bringing President Aquino’s average quarterly GDP growth rate to six percent.
The report noted that despite slowing growth, supply-side constraints would push headline inflation higher in the third quarter of 2014.
“This will cause the BSP to hike main policy rates to mop up liquidity. We expect the central bank to raise rates by 50bp by yearend, taking the policy rate to four percent,” she said.
Describing the implications of the GDP slowdown, the HSBC economist said “optimism is riding high in the Philippines and the slower-than-expected growth rate in Q1 2014 will not dampen the mood.”
“The deceleration to 5.7 percent y-o-y (year-on-year) in Q1 2014 from 6.3 percent in Q4 2014 reflects the loss of agriculture output from Typhoon Haiyan. This has been our view: growth is expected to slow to 5.9 percent in 2014 from 7.2 percent in 2013 but is still above trend thanks to sticky household consumption in the Philippines. With sluggish global demand, frequent natural disasters, and limited spending on infrastructure, the pace, although slowing, is still rather impressive,” she added.
According to the report, household spending remains solid and a key driver of growth.
“Private consumption has consistently contributed about 4 ppt per quarter to y-o-y growth in the past two years. This is thanks to sticky remittance inflows and strong demographic transitions, which fuel demand for key goods such as food and garments. Inventories, however, were a drag to growth in Q1 2014 due to output losses,” it said.
But the HSBC report warned that the Philippines is facing supply-side constraints, which would stoke inflationary pressures.
Already, the negative supply shock from Typhoon Haiyan pushed up food and household item prices. With electricity supply short and el n?no likely to cause lower than expected rainfall in Q4 2014 and Q1 2015, upside risks to inflation are high. We expect inflation to accelerate in Q3 2014,” it said.
With this, Nguyen said “the BSP, thus, will have to raise interest rates to mop up excess liquidity and temper inflationary pressures. This obviously will be costly for the central.”
“Therefore, we expect the central to hold out as long as possible, employing one more (reserve requirement rate) RRR hike before it resorts to policy and SDA rate hikes. Ultimately, rates will have to be normalized. This may come as early as the June meeting. We expect the BSP to raise the policy rate by 50bp to four percent by yearend,” she said.