The Marcos administration missed its growth objective of 6 to 7 percent last year as increased interest rates brought about by the high level of inflation reduced consumption and spending.

Data released by the Philippine Statistics Authority on Wednesday showed the Philippine economy — measured in gross domestic product or the total value of goods and services produced in a period — grew by 5.6 percent in 2023 compared to the 7.6-percent growth in 2022.

In the last quarter of 2023, the PSA reported the growth rate also at 5.6 percent, a decline from the 7.1-percent growth recorded in the fourth quarter of 2022.

In a press briefing, National Economic and Development Authority Secretary Arsenio Balisacan and PSA chief Dennis Mapa attributed last year’s economic slowdown to high inflation and interest rate increases, which affected consumption spending.

Due to global supply disruptions and economic uncertainty caused by Russia’s invasion of Ukraine in February 2022, the Bangko Sentral ng Pilipinas’ Monetary Board had raised the benchmark interest rate by 450 basis points since May 2022 to control inflation.

The percentage of growth in the cost of goods and services, known as full-year inflation, had notably slowed from 5.8 percent in 2022 to 6 percent in 2023.

“The impact of inflation is on household final consumption expenditure. We saw the impact on food expenditure (was) directly affected by inflation,” Mapa said.

“We are concerned about the low growth in real spending on food due to high food prices, though it has moderated in recent months,” Balisacan said.

Government data showed that household spending decreased to 5.6 percent year-on-year in 2023 from 8.3 percent in 2022, while the expenditure during the fourth quarter last year declined to 5.3 percent from 7 percent in the same period in 2022. 

Government spending also down

The final consumption expenditure of the government (GFCE) decreased to 3.6 percent, down from 6.7 percent in the third quarter. 

Balisacan explained that the contraction in GFCE could be attributed to a reduction in government spending in the current year compared to 2022. 

This reduction is influenced by both the election season and the ongoing adjustments related to Covid-19 vaccinations in the country. 

The NEDA chief said the government opted for “fiscal consolidation,” leading to the decline in GFCE.

“The intention was for the government spending growth for 2023 not to be high. We aim to achieve fiscal consolidation, which involves reducing the fiscal deficit and government debt,” Balisacan said.

Last 15 December 2023, the Development Budget Coordination Committee trimmed its GDP growth forecast for 2024, bringing it down from the previous estimate of 6.5 percent to 8 percent expansion to a range of 6.5 percent to 7.5 percent.

Bangko Sentral ng Pilipinas Governor Eli Remolona said last 26 January the central bank will have “more room” to raise interest rates if the economy improves in the last quarter of 2023, 

Still, he declared that the BSP will remain “hawkish” in spite of a potential rate reduction and a slowdown in inflation.

Still fastest 

Economists believe the 5.6-percent Philippine economic growth last year was still among the fastest in Southeast Asia and could be better this year if the government distributes funds to critical sectors while reducing debt.

HSBC economist for the Association of Southeast Asian Nations Aris Dacanay said the growth for the last quarter and the full year of 2023 was still above the bank’s estimate of 5.4 percent and Bloomberg’s 5.5 percent.

“This is still above market expectations. If there would be no major upside surprise in Indonesia’s fourth-quarter 2023 GDP release next week, the Philippines is in a strong position to have been ASEAN’s fastest growing economy in 2023,” Dacanay said.

Vietnam posted 6.7-percent growth and Malaysia 3.4 percent.

The latest Philippine GDP level was partly driven by higher private consumption at 5.3 percent in the fourth quarter last year from 5.1 percent in the third quarter, based on PSA data.

Specifically, household consumption comprises the bulk of GDP at 70 percent.

Dacanay said household spending will likely remain robust as more Filipinos are now employed.

“The Philippines’ unemployment rate reached its lowest level in history at 3.6 percent as many found employment in the informal sector to earn a bit of extra income for the household. We estimate that there were 2.4 million workers more than what the demographic trend would suggest in 2023,” he said.

Dacanay added that remittances from overseas Filipinos is seen to continue flowing into domestic households, providing extra funds for higher consumption, especially in times of weaker peso against the US dollar.

“Although the flow of overseas remittances in dollar terms has been slowing, the weaker-than-usual peso throughout the year helped strengthen the purchasing power of each US dollar sent back home,” he said.

Michael Ricafort, chief economist at Rizal Commercial Banking Corporation, said that overseas Filipinos remittances which grow up to $40 billion annually is “the world’s fourth largest after India, Mexico and China.”

The most notable sectoral growth, Dacanay said, was seen in spending on fixed capital assets, such as machinery, at 11.2 percent from negative growth of 1.4 percent in the third quarter.

“This was driven by a steep improvement in durable equipment, suggesting that small-scale investment projects continue to be up and running,” he said.

Government consumption declined by 1.8 percent from a positive growth of 6.7 percent quarter-on-quarter.

“Government fiscal support was challenged by high inflation and the need to prioritize debt and fiscal deficit management, consequently affecting disbursements for more productive and development focused spending,” Ruben Asuncion, chief economist at Union Bank of the Philippines, said.

The Department of Finance aims to reduce the country’s debt-to-GDP ratio to below 60 percent through gains from foreign direct investments, or FDI, and the national government’s infrastructure projects on renewable energy and sustainable agriculture.

The national budget for this year is higher by 9.5 percent at P5.768 trillion compared to the previous year, which China Banking Corporation economist Domini Velasquez said should support improvements in the business environment and external trade.

“The onus really will fall on the fiscal side. Having said that, with the amount of FDI pledges the government got, that should support fiscal spending moving forward,” Dan Roces, chief economist at Security Bank Corporation, said.