Robust domestic demand to thwart recession in PH

By Joann Villanueva

December 20, 2022, 7:57 am

<p><em>(File photo)</em></p>

(File photo)

MANILA – Elevated inflation and the expected global economic slowdown are seen to hurt economies in 2023 but an economist said domestic demand is seen to buoy the domestic economy and cushion the impact of external risks.

In a virtual briefing on Monday, Manulife Investment Management Global Macro Strategy Co-head Sue Trinh said uncertainty over when the Federal Reserve’s key policy rates add to investors’ concerns and these factors are seen to increase market volatility.

She, however, discounted any recession for the domestic economy, noting that the Philippine economy is somewhat relatively insulated from these events, which, she said, “is a very good start.”

“Domestic demand is likely to be a little softer, however, given the elevated inflation and given the base effects of pretty aggressive monetary tightening,” she said.

Economic managers recently kept the government’s 6.5 to 7.5 growth assumption for this year despite the increasing headwinds after noting robust growth in the first three quarters of the year.

Growth, as measured by gross domestic product (GDP) expanded by 8.2 percent year-on-year in the first quarter of the year, higher than the previous quarter’s 7.8 percent.

It slowed to 7.5 percent the following quarter but posted an improvement in the third quarter when it grew by 7.6 percent.

Growth in the first nine months this year stood by 7.76 percent.

This output transpired amid the continued hikes in the Bangko Sentral ng Pilipinas’ (BSP) key policy rates, which are aimed to help address the faster inflation rate, which averaged at 5.6 percent as of last November, exceeding the government’s 2-4 percent target band.

The monthly rate of price increases surpassed the government’s target band since last April due mainly to the impact of jumps in prices of oil and other commodities in the international market on account of the Russia-Ukraine conflict.

The situation is almost the same in most economies, with the US’ inflation hitting its highest in four decades.

As a result, the Federal Reserve’s key rates have been hiked by a total of 425 basis points since last March, bringing it to 4.25 to 4.5 as of Dec. 14.

The Fed rate hikes are among the factors the BSP hiked its key policy rates, citing the need to ensure adequate interest rate differential with the US.

Despite these factors, Trinh said the situation is projected to improve in the second half of next year for the global economy “during which these headwinds are likely to moderate, ushering in more conducive conditions for the financial markets.”

“Our base case is that the looming negative demand shock would be sufficient to see growth concerns overtake worries on inflation, and that could pave way for the Fed to take a dovish pivot and potentially ease rates during the fourth quarter of 2023,” she said.

She added that primary risks to the firm’s projection involve “the timing of the stagflation trough, China’s full reopening, and the US dollar’s peak.” (PNA)