Consumption unlikely to remain resilient as inflation bites

By Luisa Maria Jacinta C. Jocson, Reporter

HOUSEHOLD consumption is not likely to sustain its growth in 2023 amid rising inflation and signs of further policy tightening by the Bangko Sentral ng Pilipinas (BSP), analysts said.

“The overly aggressive tightening of the BSP this year is a big headwind for growth in 2023. We also continue to believe that the resilience in consumption this year will eventually buckle, as there’s been little progress towards the rebuild in household savings post-pandemic,” Pantheon Chief Emerging Asia Economist Miguel Chanco said in an e-mail.

“We believe that the Philippine economy ‘cashed in its chips early,’ front-loading growth to 2022 with revenge spending powering growth well past target to 7.8% full-year growth. (2023), however, could see households rebuilding savings even after the tax break from the Tax Reform for Acceleration and Inclusion (TRAIN) as inflation stays above target and the negative fallout from multi-year high interest rates finally surfaces,” ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said in an e-mail.

In the third quarter, household consumption was one of the main drivers of gross domestic product (GDP) growth.

The Philippine Statistics Authority reported that household consumption rose 8% year on year, accelerating from 7.1% a year earlier. Quarter on quarter, household final consumption grew by 5.7%.

This was mainly due to “revenge spending” in restaurants, travel, and tourism amid eased mobility, according to the National Economic and Development Authority.

“Much of the household consumption increases we have seen this year is part of the effects coming from the reduced restrictions from the pandemic. This is particularly true when classes were opened. In fact, the increases in GDP growth as well as employment rates can be attributed solely to the resumption of face-to-face classes (and the easing of restrictions on) other sectors like transportation and construction… none of this growth or so-called recovery can be traced to government programs,” Leonardo A. Lanzona, who teaches Economics at the Ateneo de Manila, said in an e-mail.

Mr. Mapa said according to a BSP study, consumers initially dipped into savings to fund the recent pickup in expenditure but have since diverted funds to rebuild decimated savings, citing a BSP study.

“The survey also indicates that households are postponing big-ticket purchases and taking on less debt, possibly showcasing the initial fallout from the lagging impact of rate hikes carried out this year,” he said.

Mr. Chanco added that the boost in spending this year was mainly temporary, citing the boost in remittances due to the peso’s decline.

John Paolo R. Rivera, an economist at the Asian Institute of Management, said that inflation and the weakening of the peso could lead to further losses in purchasing power.

Earlier this month, BSP Governor Felipe M. Medalla signaled further tightening in 2023 to contain inflation.

The central bank has raised borrowing costs by 50 basis points (bps) to 5.5%, bringing the policy rate to the highest level since November 2008.

Since May, the BSP has raised rates by 350 bps.

Headline inflation accelerated to a 14-year high of 8% in November, breaching the BSP’s target range for an eighth straight month.

In the first 11 months of the year, inflation averaged 5.6%, against the 4% posted a year earlier. The average was still below the BSP’s full-year forecast of 5.8%.

“As a result of these discombobulations, including revenge consumption, the effects of inflation have not been felt. Nonetheless, the high rate of invisible underemployment is a clear manifestation that inflation is clearly affecting the economy,” Mr. Lanzona said.

“But it has been known all over the world that these discombobulations dissipate over time. Eventually, the negative impact of inflation will be greater than the positive effects brought about by the so-called ‘economic recovery,’” he added.

Mr. Mapa said that most consumers have been willing to look past high prices this year, but this may constrain consumption next year.

“Inflation, unlike previous surge episodes, will not likely drop off quickly and face only a steady grind lower. The saying that inflation will be sticky downward should hold sway next year given how pervasive price pressures have become. Some would tie this to vibrant domestic demand but the true reason for the proliferation of second order effects would be the protracted supply side shocks emanating from the ongoing war in Ukraine,” he said.

Mr. Rivera added that instead of relying on revenge spending, the government should focus on ramping up investment, prioritizing manufacturing and services, and increasing agricultural production to drive growth.