Gov’t think tank: PH under stagflation
The Philippine economy has already entered a stagflation episode, which may warrant a shift away from expansionary government spending as further stimulus risks aggravating inflation pressures, the Congressional Policy and Budget Research Department (CPBRD) said.
In its latest discussion paper, the CPBRD said the current trends point to continued economic weakness, with Gross Domestic Product (GDP) growth unlikely to exceed 3 percent in the coming quarters, inflation staying elevated at around 8 percent and unemployment remaining near the 5 percent level.
As it is, economic growth has been slowing for three consecutive quarters, with the first quarter GDP growth rate of 2.8 percent marking the weakest expansion. At the same time, inflation has accelerated amid higher energy costs, while unemployment, despite some recent easing, remains elevated compared with post-pandemic levels.
“These figures conform closely to the contours defined by the definition of stagflation: economic growth can be readily described as sluggish, inflation is unambiguously elevated and there is notably high unemployment—all at the same time,” the think tank said.
Given these conditions, the CPBRD said the government may need to adopt a more restrained fiscal approach focused on improving efficiency rather than relying on further stimulus.
It said that expansionary fiscal policy could worsen inflation pressures without generating a significant boost to growth, particularly as the economy is facing a supply shock from higher energy costs.
CPBRD also warned that aggressive monetary tightening could create additional pressure by raising borrowing costs and worsening debt sustainability.
“The foregoing discussion strongly implies that the government could do more for the economy by doing less. Expansionary fiscal and monetary policies are expected to further aggravate existing inflationary pressures,” the CPBRD said.
“The hypothesis is straightforward. The oil supply shock raised the costs of critical inputs and shifted the supply curve inwards. In response, the government can moderate its spending, decrease the tax burden, and, in doing so, reduce the other costs of doing business,” it added.
Separately, Moody’s Ratings also flagged rising risks to the Philippines’ debt affordability as growth and fiscal risks increase amid the global energy shock.
“In the Philippines, limited subsidies and high pass-through to domestic prices will erode real incomes and dampen consumption, while investment remains subdued amid the ongoing flood-control probe,” Moody’s said, adding that higher borrowing costs from tighter monetary policy could gradually worsen debt affordability.
This comes as the major debt watchdog had maintained a negative outlook on sovereign creditworthiness in the Asia-Pacific region.
“The region is highly exposed to the energy shock stemming from the Middle East conflict, with prices set to stay elevated for some time even after the recently announced memorandum of understanding between the US and Iran,” Moody’s said.
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