By Cai Ordinario, February 19 2019; Business Mirror

Image Credit to Business Mirror

Escalating trade tensions between the United States and China could cut the Philippines’s gross domestic product (GDP) growth by 0.4 percentage points this year, according to the Asean+3 Macroeconomic Research Office (Amro).

In a report released on Monday, the Amro said “should the adverse scenario materialize[s]” on the trade tensions between US and China, the country’s economic growth would likely suffer this year.

In 2019, Amro said, the Philippine economy would post a GDP growth of 6.4 percent on the back of infrastructure spending. Inflation is also expected to average 2.9 percent this year, which is within the 2 to 4-percent target set by the Bangko Sentral ng Pilipinas (BSP).

“With much of the impact from the trade conflicts in 2018 materializing in 2019 and the risk of a further escalation, global exports growth may collapse and lead to a significant slowdown of the Philippine economy,” Amro said.

“According to Amro’s regional team estimates, trade conflicts can shave off as much as 0.4 percentage points from Philippine GDP growth, should the adverse scenario materialize[s],” it stated.

This is just one of the primary external risks the Philippine economy will be facing this year. The other is the risk of tightening of global financial conditions or the sharp slowdown of the global economy.

Amro said global growth is expected to slow mainly due to the uncertainties created by the US-China trade tensions. The think tank said there was still a risk that the global economy could be subjected to the impact of a full trade war between the two economic giants.

The slowdown in global growth could lead to tighter global financial conditions that could heighten the volatility in financial markets in the Philippines and would, likewise, affect other emerging markets.

The global risks would also affect foreign direct investment flows into the Philippines not only because FDI growth is expected to slow in 2019, but because global risks could increase borrowing costs and raise uncertainties.

“These, in turn, could keep investors cautious and cause them to hold back their investments, thus, causing a much deeper decline,” Amro said.

On the domestic front, Amro said the Philippines faces a higher-than-expected inflation and pockets of financial vulnerabilities.

Inflation could worsen if global oil prices spike or reverse the declining trend observed in the Philippines. The slowdown in inflation began in October 2018.

On top of this, inflation could worsen on the account of “delays in domestic food imports and distribution system” and expected wage increases among government workers.

“The major risks facing the Philippine economy are mostly short-term. Externally, escalating global trade tensions and a sharp tightening of global financial conditions remain the major risks,” Amro said.

“While domestic risks have started showing signs of easing, external risks have remained heightened. Policy-makers need to remain vigilant on the development of short-term risks and get ready to recalibrate their policy mix to sustain macroeconomic stability,” it added.

Amro said in order to cope, the government could streamline current expenditures and continue to improve its implementation capacity and spending efficiency of infrastructure projects, and adjust the pace of implementation so that it is in line with the absorptive capacity of the economy.

Tax reforms, Amro said, should also proceed with careful design and implementation to minimize potential negative impacts on investment and employment during the transition period.

Amro also said monetary policy should be kept appropriately tight to anchor inflation expectations and curb second-round effects. The vigilance of the BSP, Amro said, is commendable.