“Such growth of 6.5 percent in the context of price stability is very much consistent with our potential output and that should convince us that overheating is quite distant at this point,” central bank Deputy Governor Diwa Guinigundo said.
The BSP, he added, has its “ears … firmly on the ground so we could act pre-emptively.”
Singapore based DBS bank in June said it was seeing early signs of overheating, making the case for monetary policy tightening in the coming months.
“The Philippine economy is displaying early signs of overheating,” DBS had said in a report, citing nearly 7 percent GDP growth in 2016, above 3 percent headline inflation since February 2017, very strong investment growth, and more than 20 percent expansion in gross fixed capital formation in 2016.
Overheating occurs when extended economic growth leads to higher inflation and manufacturers ramp up output, creating excess capacity, in a bid to capitalize on consumer wealth.
While second-quarter real GDP growth stood at the lower end of the target range, Guinigundo said it was clearly very sustainable.
“Industry, particularly manufacturing, led the growth momentum even as agriculture and services remained robust. Public spending has recovered immensely with great support from consumption and investment,” he noted.
He also highlighted that net exports had recovered such that real gross national income (GNI) was now higher than real GDP.
Among the major economic sectors, industry recorded the fastest growth at 7.3 percent. Services slowed to 6.1 percent compared with its 8.2 percent growth a year earlier. Agriculture, meanwhile, rebounded from a 2 percent decline to grow by 6.3 percent.
The country’s primary income from the rest of the world grew by 8.6 percent compared with the 6.1 percent growth recorded in the previous year. As a result, GNI posted growth of 6.8 percent during the quarter.
“This should also validate our observation that higher economic growth required higher imports, allowed outward investments by residents and prepayments of external obligations that would in time translate into higher productivity, higher exports and still higher investments,” Guinigundo said.
“The transitory impact of course is some current account shortfall and peso depreciation,” he added.
A major component of the country’s balance of payments, the current account measures the net transfer of real resources between the domestic economy and the rest of the world.
The BSP has forecast a $600-million current account deficit for this year, which would reflect for the most part the continuation of a recent trend showing a widening trade deficit.
The peso, meanwhile, is at present is trading above P51 to the dollar, weighed down by a war of words between the United States and North Korea.
“What is therefore important is that this sustained growth path should allow us to take a longer view of economic and financial developments. From a monetary policy perspective, that gives us greater flexibility to take advantage of our existing monetary space,” Guinigundo said.