ADB drops optimism, sees economy shrinking 3.8% in 2020

by Prinz Magtulis (Philstar.com), 18 Jun 2020

MANILA, Philippines — The Asian Development Bank (ADB)’s economic outlook in the Philippines turned gloomier two months since projecting the local economy would weather the pandemic with a respectable growth.

The Manila-based lender now sees the economy shrinking by 3.8% in 2020, a massive reversal from its 2% growth forecast made in April, according to an update to the agency’s Asian Development Outlook.

ADB sees Philippines growth slowing sharply to 2%

For 2021, ADB sees the economy bouncing back with a 6.5% growth, steady from April, on the back of state infrastructure spending as well as “anticipated recovery in consumer and business confidence.”

“The forecast for 2020 is revised down to 3.8% contraction because household consumption and investment have slowed more than expected,” the multilateral agency said in its 12-page report.

“The contraction in the global economy will continue to drag external trade, tourism and remittances,” it added.

As it stands, ADB sees the economy falling deeper into negative territory this year than the Duterte administration’s 2-3.4% contraction estimate. The agency is also projecting a weaker rebound than official assumptions of up to 9% growth in 2021.

The Philippines this quarter would likely enter a recession, defined as a contraction of gross domestic product on two succeeding quarters. In the first three months, the economy surprisingly shrank 0.2% year-on-year.

The brighter consequence of a GDP slowdown is that consumer prices are likely to remain in check. On its supplement to April’s report, ADB maintained its inflation forecasts for the Philippines at 2.2% and 2.4% in 2020 and 2021, respectively. Both projections fall comfortably within the central bank’s 2-4% target.

“(Lower) oil prices offset possibly higher prices for food from feared domestic supply disruption,” the lender said. As of the May, inflation averaged 2.5% on an annual basis.

No ‘V-shaped’ recovery

As it is, the Philippines is not alone when it comes to a bleaker economic assessment. Across the broader region of developing Asia, ADB said the pandemic is slowly appearing to deal a greater than anticipated damage to economies, which overly relied on lockdowns to get the virus spread under control.

Discounting a “V-shaped” recovery, characterized by a rapid rebound from a sudden economic slump, ADB now sees developing Asia barely growing by 0.1% year-on-year from 2.2% in April. The 2021 bounce-back of 6.2% was retained.

Broken down, China, where the pandemic started, would grow slower by 0.8% from 1.8% originally estimated. South Korea is now likely to contract 0.1% in 2020 from a 1.3% initial growth projection, while India is seen to suffer a deeper dive by 4%.

Southeast Asian economies, on average, would likely shrink 2.7% this year from 1% growth seen two months ago. Among individual countries, Thailand (-6.5%), Singapore (-6%), Cambodia (-5.5%) and Malaysia (-4%) were all forecast to fare worse than the Philippines. Vietnam would likely lead the region with 4.1% growth.

“Most countries in the subregion have started to relax restrictions, but weak consumer confidence may hinder economic recovery. Moreover, external demand will remain muted for the rest of this year as the global economy contracts,” ADB said on Southeast Asia.

Tepid inflation

In terms of inflation, subdued demand particularly for oil due to the crippling pandemic is seen to temper consumer price growth to 2.9% in developing Asia this year, down from April’s forecast of 3.2%, ADB figures showed. Majority of economies in the region are net oil importers, such as the Philippines, so lower global petroleum prices would benefit consumers.

Broken down further, inflation forecasts for Southeast Asia were revised down to 1% this year, but “adjusted slightly up” to 2.3% in 2021. “Across Southeast Asia, ongoing stringent mobility measures in most economies and weakened labor market conditions curbed consumer demand, limiting price pressures for goods and services,” ADB said.