Investing in human capital is key to ensuring more inclusive growth in the long-run
MANILA, April 1, 2019 — Amidst lingering global and local uncertainties, the Philippine economy is poised to grow at 6.4 percent in 2019 and 6.5 percent in 2020 and 2021, according to the Philippines Economic Update (PEU) released here today by the World Bank.
These new estimates are lower than the previous World Bank forecasts of 6.5 percent growth in 2019 and 6.6 percent in 2020 released in January this year, owing to several factors including the delay in the 2019 budget approval and the slowing down of global trade that can lead to weaker demand for Philippine exports.
“The country’s growth outlook remains positive,” said World Bank Country Director for Brunei, Malaysia, Philippines and Thailand Mara K. Warwick. “Higher private consumption due to lower inflation, steady growth of remittances, and election spending will fuel growth this year. Growth in public investment will be tempered in the first half of 2019 but is expected to recover in the second half of the year.”
Growth of the Philippine economy has historically been driven by consumption, with households contributing more than two-thirds of aggregate expenditures.
Annual private consumption growth declined from 5.9 percent in 2017 to 5.6 percent in 2018 due to high inflation. However, it is expected to rebound to 5.9 percent in 2019 and 6.0 percent in 2020 due to declining inflation and the continued job generation in the economy. Remittances are expected to remain steady as new employment opportunities for Filipinos become available in countries like Japan, Germany, and Poland, further fueling consumption.
The PEU, however, flags several risks that can affect the Philippines’ overall growth prospects, among them the delay in the approval of the 2019 budget and a looming drought. Under a reenacted budget, the report said, the government cannot implement new programs and projects, thus affecting public investment. The El Niño phenomenon that is expected to cause several months of dry spell might reduce farm output and raise food prices.
The report highlights the risks posed by external factors, including the potential escalation of trade tensions between the US and China and weak demand for the country’s exports. It also mentions potential challenges stemming from a strengthening US dollar, and hikes in US interest rates that could raise borrowing costs for the country’s infrastructure projects.
“In the short term, key priorities for sustaining the Philippines’ rapid and more inclusive growth include prudently managing fiscal and current account balances and preserving consumer and business confidence,” said World Bank Senior Economist Rong Qian. “As government ramps up spending to implement its inclusive growth agenda, it would need complementary reforms to increase revenue and ensure that the country’s finances are sound and sustainable.”
In the long term, the report says that the country needs to focus on raising investments in human capital (people’s health, nutrition, education and skills) to speed up inclusive growth or growth that benefits the poor and most vulnerable.
“The Philippines needs to address the high rates of malnutrition among children, improve learning, and the quality of healthcare, to unleash the full productive potential of Filipinos,” said Gabriel Demombynes, Program Leader for Human Development for Brunei, Malaysia, Philippines and Thailand. “The country needs to focus on these challenges while undertaking reforms for improving the country’s capacity to create more high-paying jobs and speed up poverty reduction.”
Child malnutrition in the Philippines is high. One in three children under the age of five is stunted—the principal marker of malnutrition—and stunting rates have been stagnant for more than a decade. Malnutrition is severe among children in poor households, unleashing a vicious cycle. Children who grow up in poor households are often inadequately nourished and thus more likely to suffer from limited cognitive development. As result, they may struggle to learn in school, are at high risk of dropping out early, and face an increased likelihood of poverty in adulthood.
In the Human Capital Index report released last year by the World Bank, the Philippines scored 0.55. This means that children born in the country today are expected to achieve only 55 percent of their potential income when they reach adulthood, compared to fully healthy children who receive a complete, high-quality education. Effective implementation of the government’s human capital initiatives (for instance, the Professional Standards for Teachers, Plan of Action for Nutrition, and Universal Health Coverage Law) will make it possible for the Philippines and all Filipinos to achieve their full potential.