Global growth forecast rises amid further tightening from central banks

Global and Philippine Market Update
July 20 to July 26, 2023

Global Markets

Global Stocks were steady with investors staying on the sidelines as they awaited the impact of another Fed rate hike.

• The Federal Reserve (Fed) approved the long-awaited quarter percentage rate hike, pushing the Fed funds rate to the target range of 5.25%-5.5%, marking the highest rate in over 22 years. Although there’s a possibility of another hike, market expectations lean towards this being the final hike for the year. Chairman Jerome Powell acknowledged that inflation has eased since last year but still has a considerable way to go before reaching the Fed’s 2% target. However, he left open the possibility of pausing rate increases for the rest of the year.

• The Chinese economy is currently experiencing a potential prolonged period of slower growth, which could have significant implications following its rapid expansion and integration into the global economy. In response, the Chinese government has taken proactive steps to implement various measures aimed at stimulating economic growth. For 2023, the Chinese Communist Party has set a growth target of 5%, which is notably lower than the country’s historical average growth rate of 9%, since opening its economy in 1978. The shift in growth expectations reflect the challenges faced by economic managers in steering China’s post pandemic recovery.

• The International Monetary Fund (IMF) recently upgraded its 2023 global growth projection to 3%, indicating a positive improvement from its previous estimate of 2.8% in April. Despite some slowdown in China’s momentum, the global economy is still on a path of gradual recovery from the impact of the pandemic and Russia’s invasion of Ukraine. However, challenges persist, as tight credit conditions, depleted household savings, and the stumbling recovery in China have been highlighted by the IMF.

Philippine Stocks

Philippine Stocks gathered some momentum with growth estimates remaining strong.

• The IMF has upgraded its growth projection for the Philippines to 6.2%, from the previous 6% forecast in April, reflecting the country’s resilient domestic demand. Despite a slight slowdown in growth during the second quarter, National Economic Development Authority (NEDA) Secretary Arsenio M. Balisacan is confident that the government’s target of 6-7% growth for the year will still be within reach. Additionally, he highlighted the positive trend of decreasing inflation, which contributes to shaping optimistic expectations for the near future, fostering confidence among consumers to increase spending.

• The Philippines is poised to become one of the top-performing economies in the Asia Pacific region this year, as indicated by Moody’s Analytics. However, the country remains exposed to external risks, such as China’s sluggish economic recovery, the war in Ukraine, India’s export ban, and the potential impact of El Niño. Despite these challenges, the Philippines benefits from robust domestic demand and substantial investments in infrastructure, which serve as key drivers of its economic growth. A potential upside surprise in Philippine growth is tourism. Notably, Chinese visitor arrivals are gradually recovering but still stand at approximately 18-20% of their pre-pandemic levels.

Philippine Bonds

Philippine Bond yields continued to trend higher in line with US treasury rates.

• The Bureau of Treasury (BTr) partially awarded a fresh 7-year treasury bond at a coupon rate of 6.375%. This was 0.097% higher than the 6.278% rate quoted for a similar bond in the secondary market. The treasury made a partial award to keep yields relatively low amid the spike in global yields.

• The Bangko Sentral ng Pilipinas (BSP) is ready to resume hiking rates if necessary. BSP Deputy Governor Francisco G. Dakila Jr. stated that the BSP will continue to be data dependent and be guided by domestic developments. However, any Fed’s policy action will be taken into consideration at its upcoming August meeting. Maintaining a 1% interest rate differential between the Fed and the Philippines may be needed to minimize excessive capital outflows and prevent the Peso from weakening.
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FWD Guidance: Uncertainty leads to downside risks, but diversification and a long-term investment horizon still provide the best chance for financial success.

Sources: (1) https://www.cnbc.com/2023/07/25/what-new-norm-of-slower-chinese-growth-could-mean-for-the-global-economy.html (2) https://www.cnbc.com/2023/07/25/imf-raises-global-growth-forecast-despite-chinas-recovery-losing-steam.html (3) https://www.cnbc.com/2023/07/26/fed-meeting-july-2023-.html (4) https://www.bworldonline.com/top-stories/2023/07/26/535944/imf-raises-philippine-growth-forecast/ (5) https://www.bworldonline.com/top-stories/2023/07/27/536189/economy-faces-external-headwinds/ (6) https://www.bworldonline.com/top-stories/2023/07/26/535943/bsp-ready-to-resume-tightening-if-necessary/ (7) https://www.bworldonline.com/banking-finance/2023/07/27/536074/govt-partially-awards-7-year-bonds/

Disclaimer: The purpose of this article is to inform and should not be taken as an advice or offer to purchase securities. Seek professional advice before making a decision based on this presentation. Information given does not represent the views of FWD and its agents and employees.