Analysts flag slow recovery this year

After Q2 growth slump

MANILA, Philippines — The Philippine economy is now seen growing by only three to 3.9 percent this year, with analysts tempering their outlook after a sharper-than-expected second-quarter slowdown exposed persistent weakness in investment and household spending.

Nomura Global Markets Research slashed its 2026 gross domestic product (GDP) growth forecast to 3.8 percent from 4.6 percent, while ANZ Research maintained its 3.9-percent projection. Capital Economics was the most pessimistic, forecasting growth of around three percent this year.

The outlooks followed the economy’s disappointing 2.3-percent expansion in the second quarter, slower than 2.8 percent in the first three months and 5.4 percent a year earlier.

Nomura economists Euben Paracuelles and Nabila Amani said the second-quarter slump likely reflected the lingering effects of the flood control corruption scandal compounded by the economic shock from the war in the Middle East.

Taking the weaker outturn into account, Nomura cut its full-year forecast to 3.8 percent, although this remains within the government’s revised 3.5 to 4.5 percent growth target.

The Japanese investment bank still expects some improvement in the latter half of the year, with GDP growth seen accelerating to 4.9 percent in the second half from 2.6 percent in the first six months.

Nomura said the recovery would be supported by favorable base effects and an expected push by the government to catch up on infrastructure spending after prolonged fiscal underspending.

However, it flagged considerable uncertainty surrounding the recovery, including political risks from the impeachment trial of Vice President Sara Duterte, lingering uncertainty over the Middle East conflict and limitations to the boost that artificial intelligence-related demand could provide to Philippine electronics exports.

Capital Economics senior Asia economist Gareth Leather has an even more downbeat assessment, forecasting GDP growth of around three percent this year before improving to 4.5 percent in 2027.

He said growth should recover slightly from current levels as lower oil prices help ease inflation and restore some household purchasing power. However, he expects the improvement to be gradual as the anti-corruption drive continues to weigh on investment while higher borrowing costs restrain economic activity.

Leather also said the weakness of the economy contrasts with much of the region, where several economies managed to withstand higher energy prices and post stronger second-quarter growth.

Domestic demand was the biggest source of weakness in the second quarter. Household consumption growth slowed further to 2.8 percent, the weakest since the pandemic and well below the 5.9-percent average recorded from 2010 to 2019.

Investment was an even bigger drag, with gross fixed capital formation contracting by 13.7 percent as public construction continued to deteriorate.

ANZ similarly said the recovery in investment would be critical to the economic outlook, particularly after public infrastructure capital outlays had been declining since July last year.

“A recovery in infrastructure spending from the third quarter, as indicated by the authorities, will be a key determinant of whether growth can regain momentum,” ANZ said.

The research firm maintained its 2026 growth forecast at 3.9 percent, saying moderating inflation should provide some support to household demand while stronger exports and government consumption could partly offset softness elsewhere in the economy.

Still, ANZ warned that the country faces elevated inflation and external headwinds, with food prices potentially coming under renewed pressure from El Niño.

“With inflation moderating in July and growth slowing, the pressure on the Bangko Sentral ng Pilipinas (BSP) to hike rates at this month’s monetary policy meeting will reduce,” ANZ said.

Despite the weak GDP figures, the research houses generally expect the BSP to remain cautious about abandoning its tightening cycle while inflation stays above its two to four percent target.

Nomura maintained its call for two more 25-basis-point rate hikes in August and October, saying the central bank remains focused on bringing inflation back toward target and preventing inflation expectations from becoming unanchored.

Capital Economics expects only one final 25-basis-point increase at the BSP’s Aug. 27 meeting before the tightening cycle ends, followed by possible rate cuts from early 2027 if inflation continues to ease.