Inflation, unemployment to weigh on Philippines recovery

by Lawrence Agcaoili – The Philippine Star, 12 Sep 2021

MANILA, Philippines — An elevated inflation and unemployment rate may create a downward drag on the faster recovery of the Philippines from the pandemic-induced recession, according to economists.

“We expect elevated inflation and the recently recorded 6.9 percent unemployment level to weigh on the Philippine economic recovery,” ING Bank Manila senior economist Nicholas Mapa said.

Early last month, Dutch financial giant ING Bank lowered anew its gross domestic product (GDP) growth forecast for the Philippines to 3.8 percent from 4.2 percent. The latest projection is now lower than the revised four to five percent GDP growth target set by government economic managers through the Development Budget Coordination Committee (DBCC).

Inflation accelerated to a 32-month high of 4.9 percent in August from four percent in July due to crop damage from recent storms as well as higher energy costs that pushed utility and transport prices up by 3.1 percent and 7.2 percent, respectively.

Inflation averaged 4.4 percent from January to August, staying above the two to four percent target of the Bangko Sentral ng Pilipinas (BSP).

“Year to date inflation is now at 4.4 percent with the headline number likely staying above four percent in September,” Mapa said.

The economist said the BSP is likely to look past the price spike as BSP Governor Benjamin Diokno vowed support for the fledgling economic recovery.

Mapa pointed out an elevated inflation would likely sap some momentum from household consumption, which drives nearly 70 percent of the country’s total economic activity in the near term.

“A BSP rate hike will not likely be able to address the current food price spike nor make imported energy cheaper and thus we fully expect the BSP to retain its accommodative stance all the more with the economy still in the midst of a recession,” Mapa said.

“Furthermore, we doubt that BSP will continue to craft policy that benefits the Philippines and refrain from conducting monetary policy via-proxy that would entail mimicking rate hikes of other nations around the world,” he added.

According to ING, the peso would likely remain pressured in the near term as the BSP signals it would not likely adjust policy rates to combat the current spike in prices.

Bansi Madhavani, senior economist at ANZ Research said the continued spread of COVID infections and consequent restrictions are likely to cap demand for discretionary services.

Madhavani said the BSP would continue to view the inflation print as transitory and supply driven as the demand-side drivers of inflation are weak.

“The inflation data is unlikely to affect the BSP’s current monetary policy stance. There is no reason for the central bank to change its accommodative monetary policy stance,” Madhavani said.

According to ANZ Research, inflation would ease into the official target range of two to four percent before the end of the year.

For his part, Bank of the Philippine Islands lead economist Jun Neri said inflation would remain elevated for the rest of 2021 and the whole of 2022 because of the sustained reopening, mild depreciation of the peso against the dollar as well as demand recovery.