The Philippine economy expanded by 7.3% in 2010, the fastest pace since the mid-1970s, as demand rebounded after the 2008-09 global recession. We expect the rate of economic expansion to slow in 2011. In addition to weaker global growth, prospects for growth in the Philippine economy will be negatively impacted by a sharp rise in the international price of crude oil. The Philippines imports virtually all of its crude oil requirements. Slower growth in Japan and possible disruptions to manufacturing supply chains as a result of the March 11th earthquake and consequent tsunami may also impact growth this year. We have therefore revised down our forecast for real GDP growth in 2011, to 5.2%, from 5.4% previously. Growth will then average 5.6% a year in the remainder of the forecast period. Personal consumption will be supported by a fall in unemployment and by increased spending by the government on conditional cash transfers. The 2008-09 global recession and the seizing up of credit markets had a severe impact on fixed investment in the Philippines. However, gross fixed investment has since recovered as firms have revived expansion plans, but the growth rate in 2010 of 17.1% will not be sustained in the forecast period. Without marked improvements in the business environment, the country will not attract the levels of foreign direct investment needed to raise investment significantly, given the low level of national savings.

Exports of goods and services recovered strongly in 2010, expanding by 25.6%, after a contraction of 13.4% in 2009. In addition to stronger global economic growth, exports have been boosted by a recovery in demand for electronic goods, which account for around 60% of Philippine goods exports. However, with global growth expected to moderate this year, Philippine export expansion is set to slow again. Stronger final demand in the country's main export markets, particularly China, will support a return to faster export growth in 2012-15. Import growth will exceed export growth in 2011, but from 2012 onwards import growth will closely track that of exports, as a large proportion of imports to the Philippines consists of components used to manufacture goods that will be sold abroad.

The main downside risk to our GDP growth forecast comes from the possibility of a sharp slowdown in global economic expansion in 2011 as the fiscal and monetary stimulus measures that have been implemented around the world in the past three years are withdrawn. The conflict presently besetting the Middle East and North Africa also poses risks to the Philippines. In addition to driving up oil prices, the conflict may result in a drop in remittances from overseas workers in that region, which accounts for around 16% of remittance receipts for the Philippines. Any drop in remittances would depress personal consumption.

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