The Philippine economy expanded by 7.3% in 2010 (to record its fastest pace of growth since the mid-1970s) as demand rebounded following the 2009 global recession. We expect the rate of economic expansion to slow in 2011. In addition to a weaker global economy, the Philippines will struggle in the face of a sharp rise in the international price of oil. Slower growth in Japan and disruptions to manufacturing supply chains as a result of the March 11th earthquake and tsunami may also adversely affect Philippine growth. We expect GDP to expand by only 5.2% this year. Growth will then average 5.6% a year in the remainder of the forecast period. Private consumption will be supported by a fall in unemployment and increased spending by the government on conditional cash transfers. The 2009 global recession and the seizing up of credit markets in 2008-09 had a damaging 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 2011-15. Without improvements in the business environment the country will not attract the levels of foreign direct investment needed to raise investment significantly, given the low national saving rate. Exports of goods and services recovered strongly in 2010, expanding by 25.6%, but growth in exports will slow to an average of 6.5% a year in 2011-15. From 2012 onwards import growth will 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 the global economy in 2011 as stimulus measures that have been implemented around the world in the past three years are withdrawn. The ongoing political unrest in 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 14% of Philippine remittance receipts. Any drop in remittances would depress private consumption.

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