Last week the Philippine Statistics Authority released year-end data on the national economy, and all things considered the numbers are looking pretty good. For 2022 as a whole, the economy grew by 7.6 percent compared to 2021. Year over year, the service sector expanded by nearly 10 percent in the fourth quarter while household consumption was up 7 percent.
This makes sense, given that pandemic era restrictions are ending and people can go out and engage in every day commercial activities again. By comparison, industrial production saw a more modest 4.8 percent rise in the fourth quarter, so it appears post-pandemic growth is being primary driven by increased consumption and its impact on service industries.
This is good news for President Ferdinand Marcos Jr. Just a few months ago, many economic forecasters were predicting a global recession in 2023. While ASEAN as a whole was expected to grow even as the world economy stagnated, a global recession would still impact the Philippines by lowering demand from foreign trade markets and squeezing investment.
Global recession in 2023 no longer seems like a sure thing, with the United States closing out 2022 with decent GDP growth and inflation appearing to cool. But even back in October the Marcos Jr. administration evinced quite a bit of confidence in the economy. Going against the grain, the 2023 budget features spending increases in many areas. This expansionary fiscal stance was based on a projected 2023 growth rate of around 7 percent, which seemed optimistic at the time. But these 2022 year-end figures suggest those forecasts were not that unrealistic.
We shouldn’t be too surprised to see rapid growth year over year in 2022. The pandemic caused the Philippine economy to drastically shrink in 2020 and many sectors, such as service industries, were forced to sit idle. As things swing back into full gear and previously idled industries are revived, we would expect to see large initial year over year percentage increases as the economy makes up the ground it lost during the pandemic. It remains to be seen whether a growth rate of 7.6 percent can be maintained in 2023 and beyond, especially as consumers may not keep spending at the current pace indefinitely.
The other bit of good news for the Philippine economy is that the currency has strengthened considerably since October 2022, when it looked like it was going to push through 60 pesos to the dollar. Right now it has strengthened to around 54.5, which is in line with the upper range forecasters used to model the 2023 budget. With the Federal Reserve likely done or nearly done hiking interest rates, it seems Bangko Sentral ng Pilipinas may have weathered the worst of this global monetary tightening cycle.
A stronger peso in 2023 will come in handy, as inflation remains high and the Philippines continues to run big trade deficits. December 2022 saw a trade deficit of $4.6 billion and a headline inflation rate of 8.1 percent. A stronger peso and moderating commodity prices in 2023 mean that budget-busting imports like energy should contribute less to inflation in 2023.
As for the trade deficit, that is nothing new in the Philippines, particularly during the Duterte years as infrastructure development and investment boosted demand for imported capital goods. It’s generally offset to some degree by large inflows of secondary income from Filipinos living and working abroad, who remit a portion of their earnings back home. We will have to wait and see the extent to which these inflows offset the trade deficit in 2023, and its impact on the current account as a whole.
All things considered, these GDP figures are good news for the Philippine economy and for the new president, who on economic issues wants to continue the steady gains of his predecessor. The big difference is that economic growth under Duterte was led by investment and fixed capital formation, and this 2022 economic boom is more consumption-based.
It remains to be seen whether consumption-led growth can be sustained at this level, and whether the 2023 budget does enough to cushion the impact of higher prices on consumers. The impact of persistent trade deficits on the current account and the currency are also something to keep an eye on. But these figures show that 2022 closed on a relatively high note, and that some of the more optimistic assumptions baked into the 2023 budget may not be that far off the mark after all.