The Philippine economy is expected to post its weakest growth this year since the pandemic, driven by the ongoing conflict in the Middle East which has led to increased prices and dampened economic activity. The International Monetary Fund has trimmed its 2026 gross domestic product growth forecast for the Philippines to 3.9% from 4.1% previously.
This revised forecast is still within the government's target range of 3.5%-4.5%. The IMF noted that the country's first-quarter GDP growth of 2.8% was weaker than expected, largely due to the impact of the Middle East conflict on prices and economic activity.
The country's economic growth has been affected by oil price shocks and the lingering impact of a recent flood control scandal, which dragged down the first-quarter GDP growth below market and government expectations. The ongoing conflict in the Middle East has led to spiraling oil prices, which have fed into the costs of other key commodities and squeezed consumers' pockets.
If the IMF's projection holds true, the country's full-year expansion will be weaker than the 4.4% recorded in 2025. It would also mark the economy's worst performance since the 9.5% contraction during the COVID-19 pandemic in 2020, and would be the worst in 17 years.
The IMF's Philippine growth estimate is below its projection for ASEAN-5, which it kept at 4.1% for this year. The Philippines is expected to lag Indonesia and Malaysia but outpace Thailand this year.
The multilateral lender has trimmed the Philippine growth projection for 2027 to 5.5% from 5.8% previously, citing base effects and a potential improvement in sentiment. This is within the government's target range of 5%-6% for the year.
Risks to domestic growth may come from extreme weather disturbances and a slower-than-projected normalization of public investments and reform momentum. However, faster adoption of reforms and lower oil and food prices may provide relief to the economy.
The Philippines still faces inflationary pressures from volatile global conditions and elevated food prices. Inflation risks are tilted to the upside, reflecting the risk of renewed geopolitical tensions in the Middle East and higher food prices.
The latest inflation data showed that the country's inflation rate stood at 4.8% as of June, with the headline print remaining above target for four months in a row.
Some economists believe that the slowing inflation could prompt the central bank to cut its tightening cycle short with a likely pause in August. The Monetary Board has hiked its policy rate in recent months to contain inflation risks from the energy crisis.
The government's spending has also been a concern, with data showing that public infrastructure spending has fallen to its lowest level since the pandemic. The central bank is banking on fiscal policy to cushion the impact of higher rates on economic growth.
