MANILA (Reuters) - The Philippine economy accelerated more than expected in the third quarter, defying the global downdraft to post the fastest growth in Southeast Asia, where robust domestic demand and strong government spending are helping offset export weakness.
A sharp jump in farm output and construction, higher public and private consumption and a late rebound in exports helped boost Philippine growth by 1.3 percent in July-September from the previous quarter, three times as fast as economists had predicted.
The Philippines, once known as "the sick man of Asia", also posted the second strongest annual economic growth in Asia of 7.1 percent in the third quarter, lagging only China and outpacing the 6.2 percent expansion of Southeast Asia's biggest economy, Indonesia.
The 7.1 percent annual expansion was the strongest in two years.
"There is no denying it, the Philippines is having a fantastic year despite strong global headwinds," HSBC said in a note to investors.
"This is largely due to the fact that policymakers took timely measures to counterbalance an anticipated slowdown of demand from China and the euro zone, as well as the resilient nature of the services-oriented economy."
While Southeast Asia has not been totally immune to the global downturn -- slowing exports are weighing on industrial production -- strong private and public spending is driving robust growth in most of its economies, making the region a magnet for foreign investors.
"A strong performance all around (for the Philippines) and this stellar number continues to paint an overall positive growth picture for Southeast Asia, following the positive surprise out of Malaysia and the sustained momentum seen in Indonesia and Thailand in Q3 as well," said Gundy Cahyadi, economist at OCBC in Singapore.
In Manila, strong remittances from overseas Filipinos and renewed confidence among consumers and businesses in the economy and the reform-minded government of President Benigno Aquino are fuelling a property boom described as the best in two decades.
The Philippines expects to exceed its growth target of 5-6 percent this year after a strong performance so far that brought its annual growth in the first nine months to 6.5 percent. Indonesia, for its part, expects growth to reach 6.3 percent this year.
Domestic demand from new middle-class consumers, and investment to feed it, are now key growth drivers in Indonesia, with retail sales surging 22 percent in September.
The Indonesian government said on Tuesday it was targeting $40.6 billion in total investment next year, up around 25 percent from this year to take advantage of surging consumer demand.
L'Oreal, the world's top cosmetics firm, opened its biggest factory globally in Java this month and is seeing 30 percent sales growth as it expects Indonesia's beauty market to become the third biggest in Asia.
Consumer confidence in Indonesia was at its highest this year in October, helping push car sales up nearly 24 percent, while the Philippines posted its second best reading in September since the index was introduced in 2007.
Malaysia and Indonesia grew an annual 5.2 percent and 6.2 percent in the third quarter, respectively, although the economy of tiny, much more export-dependent Singapore contracted on an annualized basis.
Thailand grew 1.2 percent in the third quarter from the previous three months and 3.0 percent from a year earlier as factories returned to normal after last year's heavy floods.
With more foreign funds flowing into the region, stock markets in Indonesia and the Philippines both closed at record highs on Monday, with Manila's key share index .PSI hitting a fresh record high after Wednesday's GDP data. The Thomson Reuters South East Asia Index .TRXFLDANPU has climbed some 20 percent so far this year.
Foreign investors have also been snapping up debt issued by Southeast Asian government as they scour the globe for higher yields. Manila's recent sale of global peso notes attracted orders approaching $6 billion, nearly eight times the size of the offer.
But inflows have been a two-edged sword, pushing most regional currencies higher against the U.S. dollar and further undermining the attractiveness of the region's exports. The Philippine peso has appreciated more than 7 percent so far this year, making it emerging Asia's best performing currency and complicating policy decisions for its central bank.
Analysts have mixed views on how much of the region's momentum can be carried into 2013, noting much depends on how long the euro zone's fiscal and economic mess drags on, and whether recoveries in the United States and China continue to gather pace.
"The (growth) outlook for Southeast Asia will be mixed because we have markets with large consumer bases like Indonesia, Thailand and the Philippines. What could also drive growth in these countries are investment and government spending," said Enrico Tanuwidjaja, economist for Southeast Asia at RBS in Singapore.
"The rest of the region might be facing a growth slowdown because of external factors," he said.
Unlike many advanced economies, the region's governments have relatively low debt levels, which leave plenty of room for more stimulus if conditions deteriorate further.
Manila has set a record infrastructure budget of over 400 billion pesos ($9.89 billion) next year as it pursues major upgrades of roads, ports, bridges, and airports to speed up growth and boost private investment.
The Philippines has to raise its investment-to-GDP ratio from 20 percent, and match Indonesia's investments of at least 25 percent of GDP, to push growth to 7 percent or higher in coming years, said Tim Condon, regional economist at ING Bank in Singapore.
Central banks in the region also have far more ammunition left to deal with slowing growth than their Western peers, which in some cases have already cut interest rates to near zero.
Indeed, if regional and global growth does pick up, higher inflation may start to kick in towards the second half of 2013, which may put pressure on central banks of the Philippines, Malaysia, and Indonesia to hike interest rates, said Euben Paracuelles, economist at Nomura in Singapore.
But Condon said there were no major demand pressures and rates could remain steady next year in most of the region after central banks eased policy this year.
Additional reporting by Erik dela Cruz in Manila and Anuradha Raghu in Kuala Lumpur; Editing by Kim Coghill