Investing in human capital and accelerating digital transformation key to long-term growth
MANILA, December 10, 2024 ¨C Amid heightened geopolitical tensions, the Philippines¡¯ economy is expected to remain robust, growing at an average rate of 6.0 percent over 2024-2026 and sustaining poverty reduction, according to the (PEU) released today by the World Bank.
The positive outlook for the Philippine economy hinges on the country¡¯s ability to rein in inflation, implement a more supportive monetary policy to foster business growth, and sustain government spending on infrastructure to stimulate economic activity, while safeguarding against the increased global policy uncertainty.
¡°Strong growth puts the country on a firmer footing to maintain gains in poverty reduction,¡± said Zafer Mustafao?lu, World Bank Country Director for the Philippines, Malaysia, and Brunei Darussalam. ¡°The country remains vulnerable to extreme weather events such as typhoons and heavy monsoon rains. Therefore, it is important to sustain proactive measures to protect poor and vulnerable households.¡±
The growth forecast for 2024 has been revised downward to 5.9 percent from 6.0 percent due to weaker-than-expected growth in Q3 2024. Several typhoons have affected millions of people, destroyed crops and property, damaged infrastructure, and disrupted economic activity, particularly in tourism and construction. Growth, however, is expected to hit 6.1 percent in 2025 and 6.0 percent in 2026. Robust growth is expected to boost poverty reduction due to improvements in household incomes, strong job creation, and continuing economic recovery.
According to Jaffar Al-Rikabi, World Bank Senior Economist, as the country shores up its resilience against climate change and strengthens social protection for its vulnerable populations, accelerating digital transformation will be essential to unlock sustainable growth in the long term.
¡°Advancing the digital economy, including by encouraging greater adoption of core digital technologies by businesses, can expand the country¡¯s growth potential,¡± said Al-Rikabi. ¡°Increased digitalization could provide expanded market access, build resilience to economic shocks, and increase the country¡¯s productivity, efficiency, and competitiveness.¡±
Investing in human capital is just as crucial for the Philippines to sustain its growth and seize the opportunity for a ¡®demographic dividend,¡¯ which will only last for the next 20¨C25 years, Al-Rikabi added. The Philippines stands out as one of the few East Asian nations that can potentially achieve prosperity before its population ages significantly, he said.
The ¡®demographic dividend¡¯ refers to the economic growth potential that arises when the labor force is growing more rapidly than the population dependent upon it. To realize that potential, countries must implement policies that invest in human capital (i.e., education, health, nutrition, and skills) and enable employment of the growing workforce in good-paying jobs.
The PEU asserts that private consumption (the amount of money that people spend on everyday needs like food, clothing, and entertainment) is expected to remain the main engine of growth over the medium term (2024-2026), fueled by low and stable inflation, steady inflows of remittances from overseas workers, and higher employment rates that boost incomes.
Improvements in credit availability, along with falling interest rates, will support the growth of private consumption. The Philippine government is also well positioned to attract higher investments from the private sector, both foreign and local, after recently liberalizing investment rules and lowering interest rates.
The services sector will keep growing thanks to higher local spending, the ongoing recovery of both local and international tourism, and the continuing strength of the business process outsourcing (BPO) industry.
However, the PEU flags local and global risks that could hamper growth in the near term. Of particular note are geopolitical tensions and weaknesses in China¡¯s economy, which could weaken global trade, manufacturing, and tourism, especially for countries with significant economic ties to China. In addition, substantial uncertainty exists with respect to trade distortive measures introduced by large economies that may affect global trade.
Within the Philippines itself, higher inflation could erode people¡¯s incomes and constrain private consumption if it is not well managed. Adverse weather conditions may also hamper farm production and cause disruptions for tourism, construction, and industrial activities.
