BPI: Phl economy faces ‘toxic’ mix, avoids stagflation

The Philippine economy has yet to enter stagflation territory, although the combination of slower economic growth and rapidly rising prices has created a “toxic” mix that is hurting Filipinos across the board, Bank of the Philippine Islands (BPI) lead economist Emilio Neri Jr. said.

In a recent commentary, Neri said the criteria for stagflation would only be met in a long-term structural breakdown characterized by high inflation and unemployment, alongside weak Gross Domestic Product (GDP) growth.

“Technically, it is not stagflation,” he said.

“True stagflation represents an entrenched, long-term structural breakdown where high unemployment and stagnant economic output become permanently embedded alongside runaway inflation,” he added.

Economic growth slumped to 2.1 percent in the third quarter, marking the fifth consecutive quarter of slowing growth since the onset of the ‘floodgate’ scandal last year. State officials attributed the slowdown to higher prices brought about by the Middle East conflict, weather disturbances during the rainy season, and a lingering decline in public investment and investor confidence following the scandal.

With inflation surging to a three-year high of 7.8 percent in October and unemployment rising by 0.1 percentage point to 5.4 percent in August, Economy, Planning and Development Secretary Arsenio Balisacan said it was too early to make a stagflation assessment.

“I think I would wait for the end of the year to think of stagflation,” he said, stressing the need to consider the economy’s broader performance rather than just a few indicators.

Citi, however, said the Philippines was already experiencing stagflation, or “slowflation,” citing persistently high inflation, weak economic growth and rising unemployment.

Johanna Chua, Citigroup’s global head of emerging market economics, said Monday that October’s 7.8-percent inflation was far above the two-to four-percent target, while third-quarter growth was well below the country’s historical five- to six-percent pace.

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

Neri said that while the country may still avoid the technical definition of stagflation, upside risks remain tilted to the upside, describing the current combination of economic conditions as “toxic.”

“What the Philippines is currently experiencing is a severe cost-push squeeze, where acute supply-side shocks and persistent core inflation coincide with a sharp growth deceleration,” he said.

“This toxic combination of slowing economic momentum and soaring price pressures severely erodes household purchasing power and must compel all economic agencies into immediate and coordinated action,” he added.

Neri called on the Bangko Sentral ng Pilipinas to continue fighting inflation through tighter monetary policy, while other agencies implement measures to preserve purchasing power through food and energy security. He also urged the government to ramp up infrastructure spending to cushion the broader impact of the economic downturn.

“While maintaining positive real interest rates may entail near-term costs, they can support a more efficient allocation of capital by moderating investment in less productive activities and encouraging greater investment in sectors with stronger productive and earning potential, such as agribusiness, cold storage and manufacturing.”