Philippines Monthly Economic Developments August 2023 a GDP growth moderated to 4.3 percent in Q2 2023 owing to a slowdown in domestic and external demand. Manufacturing and services continued to weaken in June, although leading indicators suggest a stronger expansion in July. External demand for goods exports softened in June amid slowing global activity, while soft domestic demand led to a contraction in goods imports. The fiscal deficit narrowed in Q2 2023, as public spending declined due to ongoing fiscal consolidation and delays in budget execution. Labor market conditions remained strong, despite an uptick in unemployment and underemployment. GDP growth slowed to 4.3 percent year-on-year in Q2 2023 high interest rates led to a substantial slowdown in (7.5 percent in Q2 2022) as elevated inflation and weak construction investments. Meanwhile, weak external demand external demand weighed on services and industry . The amid slowing global activity led to a further moderation in growth contribution of services fell to 3.7 ppts in Q2 2023 (5.5 exports growth, as goods exports contracted for the second ppts in Q2 2022) as high inflation, waning pent-up demand, consecutive quarter. While the slowdown in domestic demand and tight financial conditions dampened domestic demand. led to flat import growth in Q2 2023. The growth contribution of industry fell to 0.6 ppts in Q2 2023 Inflation eased further in July. Headline inflation moderated (2.0 ppt in Q2 2022) driven by slower growth in construction to 4.7 percent in July (5.4 percent in June) due to slower uptick activities and as weak external demand weighed on in food and utilities prices and a decline in transport prices. Yet, manufacturing and mining. Growth of agriculture was year-to-date inflation (6.8 percent) is still above the 2-4 unchanged in Q2 2023 weighed by the sharp contraction in percent target of the central bank and higher than in fisheries and as livestock output slowed due to the African Indonesia, Thailand, and Vietnam. Food inflation eased due to Swine Fever. smaller increases in fish and sugar prices, while meat prices Both domestic and external demand have declined. Although declined due to improving local supply. Fuel prices posted private consumption remained the main growth engine, its large declines due to high base effects, which contributed to contribution to growth fell to 3.7 ppts in Q2 2023 (5.7 ppts in the slowdown of utilities and transport inflation. Although still Q2 2022). Slower growth was a result of elevated inflation, elevated at 6.7 percent in July, core inflation fell (7.4 percent higher interest rates, and waning pent-up demand. These in June) as demand-side pressures ease. The Bangko Sentral ng factors offset the improvements in the labor market and Pilipinas is expected to keep the key policy rate steady at 6.25 steady remittance growth. Ongoing fiscal consolidation and percent as inflation continues to slow. underspending resulted in the reversal of government Leading indicators show that manufacturing activities consumption’s contribution to growth to -1.3 ppts in Q2 2023 improved, while the recovery of tourism buoyed services. The (1.9 ppt in Q2 2022). In addition, the contribution of fixed S&P Global Purchasing Managers' Index (PMI) for investments fell to 1.0 ppt in Q2 2023 (3.2 ppt in Q2 2022) as Figure 1: GDP growth decelerated to 4.8 percent in Q2 2023… Figure 2: …owing to the slowdown in domestic demand. 15 20 10 10 5 0 Percentage point Percentage point 0 -5 -10 Agriculture Net exports -10 Manufacturing Capital Formation Other industries -20 Government Consumption -15 Services Gross Domestic Product Household Final Consumption Expenditure Gross Domestic Product -20 -30 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2019 2020 2021 2022 2023 2019 2020 2021 2022 2023 Source: PSA, BSP Source: Philippine Statistics Authority (PSA) q PHILIPPINES Monthly Economic Developments | August 2023 manufacturing climbed to 51.9 in July (50.9 in June). The the DBM to require catch-up spending plans for affected line Philippines PMI was the second highest in the region next to agencies. Through the first half of 2023, the government has Indonesia, then Thailand, while Vietnam and Malaysia executed 46.1 percent of its programmed budget. Domestic recorded contractions. The expansion was supported by both liquidity continued to support the latest offering of treasury domestic and external demand leading to faster growth in new bonds, although demand softened in August. Treasury bonds orders and factory output. On a month-on-month basis, the were oversubscribed by 1.4 times, lower than the 3 times volume of production index (VoPI) contracted by 3.5 percent oversubscription in July. in June. Services and wholesale and retail trade sector The Philippine Stock Exchange Index (PSEi) and the Philippine activities remained upbeat, posting continued PMI expansions peso weakened in early August amid the news of slower- in June. 3.2 million international visitors arrived as of end-July, than-expected Q2 GDP growth. The PSEi fell by 4.5 percent almost four times than the arrivals recorded during the same between July 14 and August 14 as investors sentiment waned. period in 2022. [compare also with pre-covid levels] Meanwhile, foreign investors turned to net sellers of local The trade deficit narrowed amid weak imports. Total goods shares, and together with weaker China trade data and recent imports fell by 15.2 percent in June yoy, weighed by weak signals of the BSP’s wariness on excessive rate hikes, these imports of raw materials and intermediate goods (-15.2 factors have resulted in peso weakening to PHP56.3/USD as of percent). Meanwhile, total goods exports posted 0.8 percent August 11 (PHP54.9/USD in July). Other regional currencies growth, slower than the 1.0 percent posted in the same period such as the Indonesian rupiah, Thai baht, Malaysian ringgit, last year, due to the weakening demand for coconut products and Vietnamese dong have also weakened in early August. and other agro-based products. As a result, the trade deficit Labor market conditions remained robust in June. The narrowed to US$ 3.9 billion (compared to US$ 5.9 billion in unemployment rate inched up to 4.5 percent in June (4.3 June 2022). percent in May). Despite the slight uptick, the unemployment The fiscal deficit narrowed to 4.8 percent of GDP in Q2 2023 rate was below the 6 percent recorded in June 2022 and the (6.6 percent in Q2 2022) driven by the decline in public pre-pandemic average of 5.4 percent. The increase in spending. The reduction in the deficit was in part driven by the unemployment rate was fueled by the surge in new job seekers increase in tax revenues by 0.2 percentage points (ppt) of GDP, and the decline in fishing and aquaculture jobs due to the as the government exceeded its collection target for the closure of fishponds in Central and Southern Luzon. quarter. Meanwhile, public spending fell by 1.6 ppt of GDP in Meanwhile, the underemployment rate rose from 11.7 Q2 2023 from a year ago, led by the reduction in recurrent percent in May to 12 percent in June. More Filipinos cited bad spending due to ongoing fiscal consolidation, the temporary weather and school-related reasons for working on a part-time reduction in transfers to LGUs in FY23, and delays in budget basis. In addition, concerns on occupation quality persist, as execution. The national government fell short of its spending the share of elementary occupations associated with lower program by 6.6 percent in the first half of the year, prompting continue to have the highest share at 30.3 percent as of June. Figure 3: Inflation continued to cool in July. Figure 4: Manufacturing sector improved in July 2023. 10 Purchasing Managers' Index (PMI) 8 Services (PISM) 65 Retail & Wholesale (PISM) Percent 6 60 Manufacturing (S&P Global) 4 55 2 50 - 45 Mar May Mar May Mar May Sep Sep Jan Jan Jan Jul Nov Nov Jul Jul 40 An index above 50 indicates an expansion, and an index below 50 Note: 2021 2022 2023 Aug Apr Apr July Mar May Mar May Feb Sep Feb Jan Dec Jan Jun Jul Nov Jun Oct implies a contraction. Data are seasonally adjusted. Headline inflation Core inflation 2022 2023 BSP policy rate Source: PSA Source: Philippine Statistics Authority (PSA) PHILIPPINES Monthly Economic Developments | August 2023 Source: PSA q Developments to Watch • Growth: Was Q2 growth outcomes a one-off phenomenon or the start of a new trend? • Inflation: Will recent increases in commodity prices lead to a reversal in inflation trends? • Fiscal: Will public spending performance improve amid underspending in H1 2023? Prepared by a World Bank team consisting of Kevin Cruz, Karen Lazaro, Ludigil Garces, Patrizia Benedicto, Radu Tatucu, and Laarni Revilla, under the guidance of Lars Christian Moller. For previous editions, please refer to the World Bank Philippines publication website. For a more detailed look at the recent developments and outlook for the Philippines, please refer to the Philippine Economic Update. PHILIPPINES Monthly Economic Developments | August 2023 Contact Kevin Cruz (kcruz@worldbank.org) for questions.