Smaller businesses face stagflation risks as growth slows

The risks of stagflation may be beginning to materialize in the Philippine economy, particularly among smaller businesses, as the combination of slower growth and rising prices continues to weigh on consumers and enterprises.

“The risk of stagflationary conditions is already there, especially for weaker businesses, industries, sectors that could have already experienced near zero if not negative growth rates, while experiencing elevated inflation,” RCBC Chief Economist Michael Ricafort told DAILY TRIBUNE.

Growth slowed to 2.1 percent in the third quarter of this year, the Philippine Statistics Authority (PSA) reported Monday. The agency also reported that inflation spiked to a fresh three-year high of 7.8 percent, while unemployment rose to 5.4 percent in September, raising concerns that the country may be entering stagflation territory.

Citigroup, meanwhile, said the Philippines was already experiencing stagflation, or what it called “slowflation.” Johanna Chua, Citigroup’s global head of emerging market economics, said Monday that October inflation of 7.8 percent was far above the government’s 2-to-4-percent target, while third-quarter growth was well below the country’s historical pace of 5 to 6 percent.

“Obviously, by that definition, you can call it stagflation or slowflation,” Chua said.

Ricafort said the strain may be more pronounced among smaller businesses, particularly those producing non-essential goods, as consumers and companies become more cautious with their spending.

“​​Businesses/Industries that produce essential products (basic necessities) would be relatively insulated; but those producing non-essentials would be more vulnerable to slower sales and earnings as consumers/households, businesses, and other institutions experience reduction in purchasing power/spending power and do cost-cutting measures in response,” he said.

The slowdown in household spending reflects this caution, with consumption growth easing to just 2.4 percent in the third quarter from 4 percent in the same period last year, suggesting that consumers are prioritizing basic necessities while postponing discretionary purchases.

The contraction in gross capital formation, which declined by 0.2 percent year-on-year, also points to continued weakness in investment activity, suggesting businesses remain hesitant to expand amid the broader economic slowdown.

Ricafort added that businesses are also struggling to protect their profit margins as they contend with higher energy and transport costs stemming from the Middle East conflict, while having to price their goods and services carefully to remain competitive.

“The opposite holds true for businesses and industries that could suffer if they do not have the pricing power due to increased competition from other local players, imports, and other substitutes, as they experience narrowing profit margins and forced absorb to the higher costs, thereby could lead to potential losses and reduced ability to pay their debts and other obligations,” he said.

On the other hand, Ricafort pointed to the country’s expanding exports sector, which has posted record highs this year, as a bright spot amid the broader economic slowdown, although exporters also face the challenge of preserving profit margins.