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Philippines GDP Q2 2023

Philippines: GDP grows at softest pace since Q1 2021 in the second quarter

According to a preliminary estimate, GDP growth waned to 4.3% year on year in the second quarter, down from 6.4% in Q1. Q2’s reading was the weakest since Q1 2021 and disappointed market expectations of a 6.0% increase. Q2’s growth moderation reflected weakening domestic activity.

Household spending growth fell to 5.5% in Q2 (Q1: +6.4% yoy), marking the weakest expansion since Q1 2021. Moreover, fixed investment growth fell to 3.9% in Q2 (Q1: +10.9% yoy) amid the Central Bank’s aggressive tightening cycle and sluggish implementation of infrastructure projects. Meanwhile, public spending contracted 7.1% in Q2 (Q1: +6.2% yoy), detracting an estimated 1.3 percentage points from overall GDP, influenced by a high base effect from last year’s pre-election spending spree.

Turning to the external front, exports of goods and services growth sped up to 4.1% in Q2 (Q1: +1.0% yoy), lending some support to overall growth. Conversely, imports of goods and services growth slowed to 0.4% in Q2 (Q1: +4.7% yoy).

On a seasonally adjusted quarter-on-quarter basis, GDP dropped 0.9% in Q2, contrasting the previous quarter’s 1.0% expansion. Q2’s reading marked the largest contraction since Q2 2020.

Our panelists see GDP growth accelerating in Q3 before slowing again at the tail end of 2023. Current projections point to average growth of about 5% in the second half of 2023, implying that full-year growth will undershoot the government’s target of 6–7%. Nevertheless, economic activity could meet said target if the authorities adopt a looser fiscal stance in the coming quarters and the Central Bank extends the pause of its monetary policy tightening cycle or even begins cutting interest rates. Meanwhile, the onset of the El Niño weather phenomenon adds further uncertainty to the outlook; a stronger-than-expected event could put agricultural output at risk amid heightened water scarcity during the main planting months and dampen growth prospects.

On the outlook ahead, ANZ analysts Debalika Sarkar and Sanjay Mathur commented:

“In our view, private consumption will continue to slow as real rates rise and pent-up demand narrows further. Moreover, the uncertainty in the agricultural sector due to weather-related shocks could put nearly 22% of employees at risk of un/underemployment. This scenario implies fiscal policy will need to be expansionary in the coming quarters.”

Nomura analysts Euben Paracuelles and Rangga Cipta added on the impact of El Niño on the outlook:

“[We] would expect the impact on GDP growth to be minimal in a mild scenario but could be more negative […] in a severe episode. Fiscal space is now more limited, so the scope for spending support measures and subsidies is low. In a severe episode, the specter of BSP [the Central Bank of the Philippines] resuming rate hikes should also return (versus our baseline that BSP has already reached the end of its hiking cycle), given BSP’s pledge to continue tightening, if upside inflation risks materialize.”

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