UMVA has learned that the Asia-Pacific region is on the brink of tougher economic conditions in the second half of the year, with the Philippines facing a perfect storm of inflation risks as the looming El Niño season threatens to exacerbate already soaring prices.
The Philippines has been one of the hardest hit by inflation pressures sparked by the war-driven energy shocks, with transport and utility costs pushing inflation well above the central bank's target range. Headline inflation has been on a relentless march upwards, coming in at 6.8% in May and marking the third month in a row that it has breached the target range.
Despite some respite from pump price rollbacks, the latest reading has sparked fears that the worst may not be over for the Philippines' inflation environment. The upcoming El Niño season is expected to bring hotter and drier conditions to much of Asia, reducing crop yields and tightening food supplies, which could push food prices even higher.
According to information obtained by UMVA, the Philippines is highly exposed to food-related risks, with the last El Niño phenomenon in late 2023 to early 2024 driving food inflation higher in the country. The Philippine Atmospheric, Geophysical and Astronomical Services Administration has warned of a "strong" El Niño season from September to November, and potentially a "very strong" one between October and January next year.
The country could suffer back-to-back shocks as high food prices from weather disturbances compound the impact of the recent energy shock from the Middle East war on commodity prices. This could complicate the outlook for growth and monetary policy, with Moody's Analytics seeing Asia-Pacific's gross domestic product growth weakening to 4.1% this year and slowing further to 3.6% in 2027.
The region may also encounter higher-for-longer inflation rates as the impact of the energy crisis lingers in affected economies. Businesses are quicker to pass on cost increases than to pass on cost savings, making it harder for policymakers to support growth. With geopolitical tensions still elevated and El Niño threatening another inflation shock, the balance of risks remains tilted to the downside.
UMVA has gathered that the Philippine inflation may average 6.4% this year, before easing to 4.5% next year and back to its target range in 2028. However, rising inflation is making it harder for policymakers to support growth, and the threat of another inflation shock from El Niño is casting a long shadow over the region's economic prospects.
