HOUSEHOLD CONSUMPTION is seen to accelerate this year amid easing inflation, Fitch Solutions’ unit BMI said.
“We hold a positive outlook for consumer spending in the Philippines in 2024 and 2025,” it said in its latest commentary.
“While household spending already recovered to the pre-COVID levels in 2022, the rate of increase slowed in 2023. For 2024, we expect an acceleration, driven mostly by easing inflationary pressures, a stable labor market and lower interest rates.”
BMI expects household spending to expand by 6.2% this year. Household consumption, which accounts for more than three-fourths of economic output, rose by 4.6% in the first quarter.
“Over 2025, household spending will hold steady, growing 5.9% year on year in real terms.”
BMI said that the downtrend in inflation and strong labor market will support private consumption.
“Easing inflation and a tight labor market will support spending, as real wage growth returns to positive territory, which will support purchasing power over the year.”
BMI expects inflation to settle at 3.2% this year, slightly below the central bank’s 3.3% full-year forecast.
For the first six months of the year, headline inflation averaged 3.5%.
However, BMI noted risks to this outlook, such as “prolonged inflation, lower remittances, and a weakening of the domestic economy.”
“Consumers still need to become used to higher than usual inflation in the short term. If nominal income growth does not keep pace with inflation, the purchasing power of consumers will deteriorate, which would be a drag to their spending.”
“Prolonged inflation, particularly in relation to food, will mean that consumers will have to increasingly allocate more of their disposable income towards meeting basic necessities.”
Geopolitical tensions, such as the Israel-Hamas conflict, may also impact inflation and interest rates, it added.
It also cited risks to remittance growth due to potential financial stress in global markets, such as the United States.
“Another risk is the strengthening of the peso, which could reduce the amount sent back by overseas workers in local currency terms,” BMI added.
Meanwhile, high levels of household debt may also dampen household spending, BMI said, as it affects disposable income of consumers.
“This is particularly true as debt servicing costs rise in response to increases in interest rates,” it said.
The COVID-19 pandemic changed household consumption patterns in the Philippines, BMI said.
“Due to mass unemployment, especially in the services sector, the country experienced a recession. Many households were forced to apply for credit and government aid in order to pay for essential items.” — Luisa Maria Jacinta C. Jocson
