Policy easing on the cards as Philippine Q1 economic growth disappoints

[MANILA] The Philippine economy grew at its weakest pace in four years in the January-March quarter as delays in passing the budget stalled government spending. The slowdown bolstered expectations that the central bank will cut rates at its meeting later on Thursday to rev up growth.

Gross domestic product (GDP) expanded 5.6 per cent in the first three months of the year, dragged by a slowdown in government spending, farm output, exports and the country's budget deadlock. The pace was slower than the previous quarter's 6.3 per cent and also the 6.1 per cent forecast in a Reuters poll.

The slowdown in one of Asia's fastest-growing economies was expected because of the delay in the approval of the national budget, which hurt the government's ability to execute programmes and pursue infrastructure and other projects.

"As we have forewarned repeatedly, the re-enacted budget would sharply slow the pace of our economic growth," Economic Planning Secretary Ernesto Pernia told a news conference.

On a seasonally adjusted basis, the economy grew 1.0 per cent in the January-March period from the previous quarter, far slower than the upwardly revised 1.8 per cent in the fourth quarter of 2018.

The Philippine peso fell to a low of 52.35 against the US dollar in early Thursday trade, from Wednesday's close of 52.11, while the benchmark stock index was down nearly 2 per cent after the data was released.

Market attention will now be on the Bangko Sentral ng Pilipinas' (BSP) rate review later in the day, where it may adopt an easing bias or cut rates to support an economy hobbled by weak farm output, the US-China trade dispute and slowing global growth.

"This is a big disappointment," Chidu Narayanan, economist at Standard Chartered, said of the weaker-than-expected growth in the first quarter. "We think BSP will start its rate cutting cycle with a 25 basis points (bps) rate cut this afternoon."

GOVT SPENDING SLOWS

Growth in government spending slowed to a near two-year low of 7.4 per cent in the first quarter from 12.6 per cent in the fourth quarter, the data showed. That outweighed the pick-up to 6.3 per cent in domestic demand growth from 5.3 per cent.

Mr Pernia said the economy needs to grow by an average 6.1 per cent over the next three quarters to achieve the government's downwardly revised growth target of 6-7 per cent this year.

Asked if he thought monetary policy should be eased to support the economy, Mr Pernia said he would leave it to the BSP. He noted that Governor Benjamin Diokno had said he was pro-growth when he was appointed to head the central bank.

Michael Ricafort, economist at RCBC in Manila, expects the central bank to cut key policy rates and or lower banks' reserve requirement ratio.

The country's exports shrank for a fourth straight month in March, data showed on Wednesday, underlining weak external demand, while farm output - accounting for about a tenth of the country's GDP - slowed in the first quarter.

Economists believe the central bank can afford to place greater emphasis on growth as inflationary risks have subsided.

Easing food and fuel prices helped cool inflation for a sixth straight month in April to 3 per cent, matching the mid-point of the central bank's 2-4 per cent target for the year.

Last month's dip in consumer prices reinforced views in a Reuters poll that the central bank would start reversing some of last year's policy rate hikes which totalled 175 bps to rein in red-hot inflation.

Eight of 12 economists in the poll predicted the central bank would cut its benchmark interest rate by 25 bps on Thursday to 4.5 per cent.

Four of the eight further said the policy rate cut would also be accompanied by a 100 bps reduction in the reserve requirement ratio, currently at 18 per cent, to ease liquidity conditions. In March, the government cut its 2019 growth target to 6-7 per cent from 7-8 per cent, reflecting the absence of a new budget and the impact of the US-China trade dispute. Last year, the economy expanded 6.2 per cent.

The Philippines has been one of the fastest-growing economies in the region, underpinned by the government's ambitious infrastructure program.

A sharp slowdown in inflation from a nine-year high last year may give a boost to household consumption, which comprises more than 65 per cent of GDP.

Economic managers are pinning their hopes on the mid-term election in May - and the heavy campaign spending that comes with it - to power growth.

REUTERS, BLOOMBERG