Economy likely to pick up but Q3 ‘may remain tepid’
FMIC, UA&P see July-Sept growth of ‘6.5% or less’; another 25-bps hike
Economic growth will accelerate in the last six months of the year following a second quarter slowdown, an investment bank and an academic institution said, with support coming from government spending and increased dollar remittances due to a weaker peso.
In the August issue of their joint Market Call report, First Metro Investments Corp. (FMIC) and the University of Asia and the Pacific (UA&P) said their 7.0-percent forecast for the April-June quarter had been “crushed” as a double-digit rise in factory output failed to boost manufacturing’s contribution to the economy, which slowed to 6.0 percent during the period from 6.6 percent three months earlier.
“The investment-led growth narrative remains intact,” both claimed, noting that investment spending as a share of gross domestic product (GDP) had hit a 10-year high and that foreign direct investments could near $12 billion this year.
“Infrastructure and capital outlays should continue to expand at a rapid pace while durable equipment and manufacturing output shall remain robust,” they added.
Still, with high inflation and an exports contraction continuing to weigh on the economy, it said the expansion for July-September “may remain tepid” at “6.5 percent or less,” below the government’s 7.0-8.0 percent target for the year. Underlying growth momentum, however, will be shored by robust construction and manufacturing activity.
For the full year, FMIC and the UA&P expect GDP growth to hit 7.0-7.5 percent, within the target and rising from the 6.7-percent recorded in 2017.
“The saving factor” for the third quarter, they said, will be lower food prices due to the September rice harvest, larger imports and a likely decline in crude prices. Power rates are also expected to go down as hydroelectric plants ramp up output due to the rainy season.
Inflation, which hit a fresh five-year high of 5.7 in July, was forecast to peak this month at 5.9 percent due to the impact of weather disturbances. A 50-basis point (bps) rate hike ordered by the Bangko Sentral ng Pilipinas (BSP) this month may assuage markets, FMIC and the UA&P said, but monetary authorities are likely to follow this up with a 25-bps adjustment before the year ends to address inflation expectations.
Consumer price growth will likely average 4.2-4.5 percent this year, above the BSP’s 2.0-4.0 percent goal.
“We still think that exports growth will turn positive in H2 as there is some six months lag between the peso depreciation and improvement in exports,” both also said.
The last BSP rate hike should reduce provide some relief for the currency but renewed pressure could arise in the last three months of the year as further US Federal Reserve rate adjustments and a strong US economy continue to divert foreign fund flows.
The peso, which has been trading in P53:$1 territory since June, was forecast to end the year at P53.90 against the dollar.
Inflation and the peso’s weakness will also weigh on the stock market notwithstanding a July rally.
While FMIC and the UA&P have a 7,900-8,200 forecast for the Philippine Stock Exchange index this year, its said that meeting this would “require a definitive easing of inflation and exchange rates, backed by better Q3 earnings.”
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