The report forecasts growth to ease to 9.5% in 2009 on the back of a reduced trade surplus and slower growth in investment as a result of the global economic downturn.
"Weaker external demand and the impact of monetary policy tightening trimmed economic expansion to a still-rapid 10.4% in the first half of this year," says Ifzal Ali, Chief Economist of the Manila-based regional development bank.
The report says growth in imports outpaced that of exports, cutting the trade surplus by 11%. Slower demand from industrial countries affected exports, and high commodity prices inflated the cost of imports.
The ADO Update reports that fixed investment growth in real terms eased to around 15% in the first 6 months of 2008, down from the robust 22% registered in 2007.
A confluence of factors was responsible for the slowing in investment growth: rising prices for fuel, power, and raw materials; reduced growth in industrial profits; a slowdown in the property market owing to a tightening of credit; and government directives to reduce fixed investment in real estate, steel, cement, aluminum, and automobiles.
Private consumption stayed strong in the first half of 2008, bolstered by growth in real incomes and the creation of 6.4 million jobs in urban areas.
"The resilience of private consumption amid the deceleration in investment and exports indicates progress in rebalancing the demand-side structure of the economy," says Mr. Ali.
Inflation peaked at 8.7% in early 2008, driven mainly by escalating food prices. A better than expected grain harvest and an increase in pork production – which dropped in 2007 due to a pig virus – provided relief in the middle of the year. Consumer prices are now forecast to increase by 7.0% in 2008, revised from the ADO 2008 projection of 5.5%.
For 2009, the report revises its inflation projection upward to 5.5% from 5.0% in April. Price increases for fuel and electricity are anticipated, which will lead to higher production costs that may be passed onto consumers.
The ADO Update expects bank lending controls to ease beginning in the second half of 2008 to assist small firms and avoid downsizing. Fiscal policy is projected to remain slightly expansionary.
"A growth rate of 9.5% in 2009, as we have forecast, would bring the economy back to its long-run sustainable growth range of 9-10%, easing the strains on energy, inflation, and the environment," says Mr. Ali.
The main risks to the outlook, the report notes, would be a sharper than expected deceleration in exports and double-digit inflation that would require aggressive monetary policy tightening.
