We need more growth

We are currently in the middle of the earnings season in the Philippine stock market. Many large-cap companies have already reported their profits for the second quarter, such as Ayala Land, SM Prime, Universal Robina, Monde, BDO, BPI and SM Investments.

Based on the reported earnings, the profit situation in the market seems to be within expectations, not terribly disappointing. Given that forecasts are conservative, reported earnings also do not inspire optimism about the near-term direction of corporate profitability in the market.

But it is not just corporate earnings reports this week that seem uninspiring.

GDP growth for the second quarter of 2025 was reported to be at 5.5 percent. While this can be viewed as stable growth, given that the first quarter growth was at 5.4 percent, GDP growth was slightly weak.

We need to consider that growth benefited from a low base effect for agriculture, which suffered from the El Niño phenomenon in 2024. Without this lower base, the second quarter GDP growth could have been worse than the first quarter GDP growth and not better.

Investment spending is still missing from GDP growth. The growth in capital formation grew by only 0.6 percent year-on-year given a significant deceleration in construction spending from the first quarter’s growth rate of 7.0 percent. It was a contraction in government construction that held back construction spending during the quarter, but it may have been a function of the election spending ban.

Instead of construction, we note that public administration and education services surged by 16.7 percent and 16.5 percent y/y, respectively, in the second quarter, possibly due to the elections. The release of the rice buffer to bring down rice prices occurred during this period.

Overall, investment decelerated government spending remained robust in the second quarter. If the government spending had been more conservative, and combining this with the argument of the role of a low base effect for agriculture, then GDP growth could have been less.

However, GDP increased by 5.5 percent, which is within the capacity of the economy. It is a level of growth that is sustainable.

Consumption, which is our main engine of growth, is very healthy. Consumer spending grew by 5.5 percent in the second quarter, which is very robust relative to post-pandemic growth. Except for demand for household items, consumer spending is robust across the basket.

Consumers benefit from a more stable inflation environment. Inflation in June has been one of the lowest in recent years, and the lowest point over the past 12 months at 0.9 percent. The release of the rice buffer was a large contributor to the sharp disinflation.

Despite this, we cannot be complacent. The government has been right in supporting growth amidst the elevated risk aversion of firms and investors.

However, this has a cost, and that is the fiscal deficit, which remains wide and, if not narrowed in the medium term, can spell credit issues for the economy.

This is why the direction of the Bangko Sentral ng Pilipinas (BSP) over interest rates currently matters greatly. Further cuts should theoretically spur investment spending and/or the readjustment of balance sheets that can support greater profit growth and increased risk appetite.

The reasoning is clear, and the timing is right. We need more growth for the economy and the markets, and the sooner we achieve our neutral rate, the rate where policy traction is achieved, the better.