Despite these downgrades, the IMF’s forecast remains higher than the 5.5% growth recorded in 2023, though it falls short of the government’s more ambitious targets of 6-7% growth in 2024 and 6.5-7.5% in 2025. The reduced projections reflect a more conservative outlook on the country’s ability to stimulate private consumption in the face of persistently high food prices.
Private consumption is a critical driver of economic activity in the Philippines, contributing roughly 70% of the country’s gross domestic product (GDP). In the second quarter of 2024, private consumption grew by 4.6%, significantly slower than the 5.5% expansion during the same period in 2023. According to Arbatli-Saxegaard, the IMF was expecting stronger momentum in household spending but was met with underperformance in the first half of the year.
“Private consumption in the first half of the year grew slower than anticipated, likely due to rising food prices, especially for staple items like rice,” she explained.
High inflation, driven by food costs, has eroded purchasing power, leading to more cautious consumer spending. For much of 2023 and 2024, food prices have been a major source of inflationary pressure, particularly as the country dealt with supply issues in the agricultural
sector. The IMF warned that while consumption is likely to recover, it will do so at a slower pace, pulling down overall growth.
Inflation has been a central concern for the Philippine economy, with the Bangko Sentral ng Pilipinas (BSP) aggressively raising interest rates by 450 basis points from May 2022 to October 2023 to combat rising prices. However, the rate hikes had a cooling effect on consumer spending and economic expansion. In August 2024, inflation fell to a seven-month low of 3.3%, down from 4.4% in July. Year-to-date inflation averaged 3.6%, within the BSP’s target range of
2-4%.
Saxegaard indicated that non-monetary measures to reduce food prices, particularly for rice, have contributed to the inflation slowdown. Recent tariff cuts on imported rice and other interventions to ease food prices have helped bring inflation closer to the government’s targets. As a result, the IMF expects inflation to average 3.3% for 2024, with a further easing to 3% in 2025.
The BSP’s recent move to lower its key policy rate by 25 basis points, bringing it down to 6.25%, marks a shift from its prior hawkish stance. This was the first rate cut in nearly four years, following a period of aggressive tightening to rein in inflation. Saxegaard said the IMF supports this gradual reduction of borrowing costs, especially as inflation expectations align with the BSP’s targets.
However, she also cautioned that future central bank policy could face a delicate balancing act. “If there is a significant global economic slowdown, the BSP could opt for more aggressive rate cuts to stimulate growth. But on the other hand, new supply shocks, such as rising oil prices or food supply disruptions, could require a more restrictive approach to prevent inflation from reigniting,” Saxegaard said.
The BSP is scheduled to meet in October and December to reassess its monetary policy, with potential further rate cuts on the table if inflation remains under control and growth slows more than expected.
The Philippine government has set higher growth targets than the IMF’s forecast, with hopes of achieving between 6-7% GDP growth in 2024 and 6.5-7.5% in 2025. To meet these targets, the government has emphasized infrastructure development, increased public spending, and reforms aimed at enhancing productivity in the agriculture and manufacturing sectors. However, the IMF’s downgraded projections suggest that meeting these goals may be more challenging, especially given the sluggish pace of private consumption growth.
The IMF acknowledged that the Philippines continues to have one of the strongest growth outlooks in the region. Saxegaard noted that reforms aimed at improving food supply chains and boosting household purchasing power could support stronger economic recovery, but high inflation and external shocks remain significant risks.
While the IMF’s downgraded growth forecasts for the Philippines in 2024 and 2025 reflect concerns over slower private consumption, the country’s economy is still expected to grow at a robust pace compared to regional peers. Lower inflation and potential policy rate cuts offer some optimism for a recovery in household spending. However, risks remain, and much will depend on the success of ongoing efforts to stabilize food prices and maintain a favorable inflation environment.
With the government aiming higher than the IMF’s projections, the coming months will be crucial in determining whether the Philippines can meet its ambitious growth targets amid external headwinds and domestic challenges.
