Why the Philippine economy may be slowing down

In an economy that is driven largely by consumption, understanding how households spend their income can reveal a great deal about where the economy is headed.

In the Philippines, consumer spending is the single largest driver of economic growth and accounts for about 73 percent of gross domestic product (GDP).

Last year in this column, we examined this relationship in an article titled “Consumer spending and the stock market.” Using the concept of marginal propensity to consume (MPC), we analyzed how changes in household spending behavior could eventually influence corporate earnings and stock market valuations.

MPC measures how much of every additional peso of income is spent rather than saved. It is computed by dividing the change in consumption by the change in income.

For example, if households receive an additional income of P1,000 and spend P800 of it, MPC would be 0.8, which means that 80 percent of new income circulates back into the economy through spending.

In general, a higher MPC supports stronger economic growth because income flows quickly back into businesses.

A declining MPC, however, suggests that households are becoming more cautious as they pay down debt, increase savings or adjust spending due to rising costs.

Before the pandemic, the consumption cycle followed a fairly predictable pattern.

In the first quarter, households spent about 58.6 percent of incremental income. The pace of spending then slowed during the middle of the year, as MPC fell to around 35.9 percent in the second quarter and about 17 percent in the third quarter.

By the fourth quarter, as the holiday season approached, consumer spending accelerated and MPC rose to nearly 69.7 percent. This yearend surge in spending helped sustain economic momentum.

The pandemic, however, disrupted this pattern. When we examined postpandemic data in last year’s column, we found that the consumption cycle had changed significantly.

MPC in the first quarter averaged around 54.4 percent, already below the prepandemic norm. More strikingly, the second and third quarters turned negative. MPC averaged -16 percent in the second quarter and -141.2 percent in the third quarter.

Only in the fourth quarter did spending recover. MPC reached about 61 percent, largely because of holiday demand, although this remained below earlier averages.

Negative MPC readings are unusual. They suggest that households are not merely spending less of their income but are actually reducing consumption even as income rises. This may occur when households need to rebuild savings or reduce debt obligations.

The question today is whether the situation has improved. If we look at GDP data in 2025, the results suggest that the pattern hardly improved at all.

MPC in the first quarter of 2025 was about 58 percent, slightly higher than the post-COVID average of 54.4 percent.

But spending weakened again in the middle of the year. In the second quarter, MPC fell to about –33 percent, worse than the post-COVID average of –16 percent.

In the third quarter, MPC remained negative at around –40 percent.

By the fourth quarter, the consumption cycle recovered, as expected, because of the traditional surge in holiday spending. MPC rose to around 63 percent, although this remained below prepandemic averages.

This prolonged weakness in MPC has begun to affect the sales and earnings performance of retail companies listed on the Philippine Stock Exchange.

Last year, we tracked the sales and earnings of 14 companies in the retail sector: All Day, All Home, Figaro, Fruitas, Jollibee, Keepers, Max’s, Philippine Seven, Puregold, Robinsons Retail, SSI, Shakey’s, Upson and Wilcon.

Our findings showed that the median sales growth of these companies fell from 33.1 percent in 2022 to 16.4 percent in 2023, and then to 9 percent in 2024. By 2025, median sales growth slowed to about 6.6 percent.

See Also

PAL 85th anniversary short film spotlights working student inspired to pursue aviation career

The slowdown in demand also became more visible in earnings. In 2022, the median earnings growth of the group, based on 12-month trailing income, stood at 12.2 percent. This slowed to 6.2 percent in 2024.

By 2025, however, the trend reversed. The sector posted a 9.8-percent decline in median earnings growth.

Looking ahead, the direction of the consumption cycle will depend on how the Middle East conflict affects global energy markets.

For an oil-importing country like the Philippines, sustained increases in oil prices translate to higher transportation costs, electricity rates and food prices.

When a larger share of household budgets goes to essential expenses, discretionary spending tends to weaken. If oil prices remain elevated for an extended period, MPC could decline further, particularly during the middle quarters of the year, when spending is already relatively weak.

If MPC continues to weaken in the coming quarters, retail growth and corporate earnings could slow in an economy that relies heavily on consumption.

Consumer spending remains the backbone of economic growth, but recent data suggest that it may be losing momentum.

Henry Ong is a registered financial planner of RFP Philippines. To learn more about investment planning, attend 116th batch of RFP Program this May. To register, e-mail at info@rfp.ph.

******

Get real-time news updates: inqnews.net/inqviber