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Inflation, unemployment seen weighing on economy in 2021

THE RECOVERY will be hindered by inflation and the weak job market this year, possibly outweighing positive factors like the vaccination campaign, tax reforms and the infrastructure program, Pru Life UK Investments said.

“As long as we see curtailed movement around the country, economic recovery may continue to be slow. So as a consequence of the curtailed movement, we also see inflation being a problem,” Pru Life UK Investments Head of Equities Charles Wong said at the company’s launch of two new funds.

The government expects the economy to grow by 6.5% to 7.5% this year following the record 9.5% contraction in 2020.

“We do expect GDP to grow by the second quarter due to a combination of looser restrictions and of course base effect from last year,” Mr. Wong said.

“We do hope that government spending picks up dramatically by the third quarter and fourth quarter to make up for the weak consumer spending and the multiplier effect from consumer spending,” he added.

Inflation picked up in recent months, with the February Consumer Price Index rising 4.7%, the second consecutive month the indicator has exceeded the government’s target band of 2-4%.

Mr. Wong said inflation is only likely to return to a “more acceptable level” by 2022.

Bangko Sentral ng Pilipinas Governor Benjamin E. Diokno said the central bank expects headline inflation to remain high in the next few months due to supply-side factors such as the African Swine Fever outbreak and higher oil prices, though inflation could taper off by the second half.

The Monetary Board (MB) last month maintained the key policy rate at 2% but raised its inflation forecast for the year to 4% from 3.2%.

“There’s an inflation danger. They’ve been saying that it is transitory but if you look at global prices of commodities particularly oil given that we are an importer, that’s something that would seep into the inflation more and more as oil prices move higher,” Pru Life Investments UK Head of Fixed Income Ricky Maddatu said.

In its previous policy-setting meeting, the Monetary Board also raised its forecast for the Dubai crude oil benchmark in 2021 and 2022 to averages of $54.65 (from $47.57) and $51.98 ($47.44) per barrel, respectively.

“As long as we maintain this trajectory in terms of the vaccine rollout, in terms of the reopening of the economy, and there are no other obstacles that come up, most likely the next movement is a rate hike,” Mr. Maddatu said.

Mr. Diokno has said the MB will remain accommodative and keep rates low to provide support until the country is back to its pre-pandemic growth track.

Aside from inflation, Mr. Wong said another downside risk to growth is unemployment which remains stubbornly high.

He said there has been a “worrying trend” in the October labor force data which showed unemployment actually increased for the age groups 25 to 34 and 35 to 44, which is “the most productive age for the country.”

The Philippine Statistics Authority said the jobless rate in October fell to 8.7%, equivalent to 3.813 million unemployed, improving from the 10% unemployment rate in July but still much higher than the 4.6% in October 2019 when 2.045 million were jobless.

Unemployment peaked at 17.6% in April last year, equivalent to 7.228 million jobless individuals at the height of the lockdown. The preliminary results of the January Labor Force Survey will be released Tuesday.

Pru Life UK Investments had assets under management at the close of 2020 of P10.4 billion, according to Pru Life UK Investments Chief Executive Officer Lee C. Longa. — Luz Wendy T. Noble

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