Domestic demand drives Philippine economic growth in Q2, GDP likely to grow 6.5 pct in 2018

Philippine economic growth decelerated marginally in the third quarter, coming in a bit below market expectations. The GDP growth came in at 6.1 percent year-on-year in the September quarter, a slight deceleration from 6.2 percent in the prior quarter and below the consensus expectations of a growth of 6.2 percent. The headline print was greatly weighed on by net exports. However, domestic demand continued to be strong, growing 9.6 percent. Domestic demand contributed 10.2 percentage point to the GDP growth.

At the component level, fixed capital formation grew 16.5 percent year-on-year, stimulating the expansion in the domestic demand. Government consumption recorded another solid rise of 14.3 percent year-on-year in the third quarter. On the contrary, private consumption eased for the second straight quarter to 5.2 percent from 5.9 percent in the second quarter, likely due to lowered purchasing power from higher inflation.

Net exports negatively contributed 4.1 percentage point from the overall economic growth, mainly due to a solid import growth of 18.9 percent year-on-year. This drag from net exports was the highest since the third quarter of 2016.

“We continue to expect full year GDP growth at 6.5 percent, albeit with downside risks. This downward bias notwithstanding, we remain of the view that domestic demand conditions stay strong and is the principal cause for the deterioration in the trade balance as well as accelerating inflation”, said ANZ in a research report.

However, the fall in inflation is expected to be gradual as the usual drivers of solid domestic demand and weak peso are likely to cap the downside.

“Bringing inflation back to the Bangko Sentral ng Pilipinas’ (BSP) target range of 2-4 percent will therefore, require further policy response. As such, we expect a final rate hike of 25 bps to 4.75 percent at their December meeting”, added ANZ.