Fitch Solutions, an affiliate of debt watcher Fitch Ratings, expects household spending in the Philippines to grow 4 percent in 2021 and achieve full recovery from the impact of the pandemic next year.
“We forecast real household spending in Philippines to post growth of 4 percent year-on-year in 2021, the start of a recovery from the 8.3 percent y-o-y contraction in household spending estimated over 2020. As a result, we believe that a full recovery of Philippines’s consumer and retail sector will only take place in 2022, with conventional growth returning in 2023,” Fitch Solutions said in its latest Country Risk & Industry Research on the Philippines.
The research firm said total household spending in real terms was expected to reach P10.6 trillion this year, which would remain down the pre-pandemic spending of P11.1 trillion in 2019.
It said vaccination drive in the country was lagging behind the wider Asia region, with 9.9 percent of the population having received at least a dose as of July 23. “As such, we believe that most COVID-19 related restrictions will only be removed in the late 2021, allowing for continued consumer spending growth in 2022, reaching 5.1 percent year-on-year,” it said.
Fitch Solutions also said high-frequency data indicated improvements in consumer confidence on the back of better employment. The unemployment rate in the Philippines trended down from a high of 17.6 percent in the second quarter of 2020 to 8.7 percent in the second quarter of 2021.
“We forecast the average unemployment rate for 2021 to decrease to 11 percent, an improvement from 14.5 percent of 2020. While this is still higher than a pre-COVID environment [the unemployment rate averaged 5.1 percent over 2019], it indicates an improving economic and employment environment, which will bolster consumer confidence and spending,” it said.
Fitch Solutions said that at an index score of -30.9, consumer confidence in the country was still relatively low in the second quarter, compared to -26.6 in the second quarter of 2020 and -1.3 in the second quarter of 2019. However, the latest readings mark an improvement on the -54.5 score registered over the third quarter of 2020 at the previous peak of the outbreak.
This better outlook comes from expectations that there will be more jobs and better incomes, fewer quarantine restrictions, and more businesses reopening, it said.
It said the forecast for an improvement in consumer spending in Philippines in 2021 was in line with its country risk team’s forecast that the Philippine economy would grow by 5.3 percent in 2021, from an estimated 9.5-percent contraction in 2020.
“The main driver of economic growth is the rebound in consumer spending, which contributes 73.5 percent of GDP in 2021. Our Country Risk team expects household savings rates to remain elevated given the pandemic uncertainty and loss of income over past quarters, while the domestic employment situation is unlikely to improve markedly in the near term. As a result, the Philippines economy is expected to fully recovery only in 2022, with more conventional growth patterns returning in 2023,” it said.
Fitch Solutions said economic growth would be underpinned by consumer spending, easing unemployment, and a continued recovery in the country’s tourism industry.
It said rising inflationary pressures would be a key risk to consumer spending in the second half of 2021, as it has the potential to erode purchasing power. It noted that the consumer price index was ticking up, reaching 4.1 percent year-on-year in June and averaging 4.4 percent in the first half.
“Our Country Risk team projects that inflation has already peaked in the first half, and that it will average 4 percent y-o-y over 2021 and 3.4 percent y-o-y over 2022. We do not believe that these levels of inflationary pressures will derail our consumer outlook,” it said.
Fitch Solutions also noted that the government has varying levels of lockdown and/or stay-at-home orders in place across local government units. According to the Oxford COVID-19 Government Response Tracker, the Philippines’s restrictions remain relatively stringent, with a Stringency Index score of 71.8 out of 100 as of July 26.
“We believe, however, that restrictions will ease further as more Filipinos receive COVID-19 vaccines,” it said.
Fitch Solutions said that is global view for a notable recovery in consumer spending relies on the ability of authorities to vaccinate a large enough proportion of their populations and thereby experience a notable drop in COVID-19 infections and a decline in hospitalization rates.