By Katherine K. Chan, Reporter
THE PHILIPPINE ECONOMY could post its weakest growth this year since the pandemic, as the Middle East war drives up prices and dampens economic activity, the International Monetary Fund (IMF) said.
In its latest World Economic Outlook (WEO) released on Wednesday, the IMF trimmed its 2026 gross domestic product (GDP) growth forecast for the Philippines to 3.9% from 4.1% previously. This is still within the government’s 3.5%-4.5% target.
“This reflects a weaker-than-expected outturn in the first quarter of 2026 (2.8%) alongside a larger-than-expected effect of the war in the Middle East on prices and activity in the Philippines,” an IMF spokesperson said in an e-mail.
Oil price shocks and the lingering impact of the flood control fallout dragged first-quarter Philippine GDP growth below market and government expectations at 2.8%.
Since the United States and Israel first launched attacks on Iran on Feb. 28, spiraling oil prices 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, when a massive flood control corruption scandal dampened public spending, investments, and sentiment.
It would also mark the economy’s worst performance since the 9.5% contraction during the COVID-19 pandemic in 2020.
Excluding the pandemic, it would match the 3.9% expansion in 2011 and would be the worst in 17 years or since the 1.4% in 2009.
The multilateral lender’s Philippine growth estimate is below its projection for ASEAN-5, which it kept at 4.1% for this year. ASEAN-5 is composed of Indonesia, Malaysia, the Philippines, Singapore, and Thailand.
The Philippines is expected to lag Indonesia (5%) and Malaysia (4.7%) but outpace Thailand (1.9%) this year.
At the same time, the IMF trimmed the Philippine growth projection for 2027 to 5.5% from 5.8% previously, on the back of base effects and a potential improvement in sentiment.
This is within the government’s 5%-6% target for the year. It is also above the IMF’s 2027 growth projection of 4.3% for ASEAN-5.
“The rebound in 2027 is driven mainly by favorable base effects, alongside a gradual pickup in investment as confidence improves and supply-side effects related to the war ease,” the IMF spokesperson said.
According to the multilateral lender, risks to domestic growth may come from extreme weather disturbances, as well as a slower-than-projected normalization of public investments and reform momentum.
However, faster adoption of reforms, alongside lower oil and food prices, may provide relief to the economy.
“On the upside, accelerated implementation of structural and governance reforms can boost investment and FDI (foreign direct investment), increase fiscal multipliers and boost potential growth,” the IMF spokesperson said. “A faster decline in energy and food price provides additional upside risks.”
INFLATION RISKS REMAIN
Meanwhile, the multilateral lender said the Philippines still faces inflationary pressures from volatile global conditions and elevated food prices, among others.
“Inflation risks are tilted to the upside, reflecting the risk of renewed geopolitical tensions in the Middle East and higher food prices, de-anchoring of inflation expectations, tighter global monetary conditions, and lower remittances,” the IMF spokesperson said.
The latest WEO does not include an update on the IMF’s inflation forecasts, but its projections as of April show it expects Philippine inflation to average 4.3% this year and 3.2% in 2027.
If realized, headline inflation will breach the Bangko Sentral ng Pilipinas’ (BSP) 3% target for two straight years, marking a sharp acceleration from the 1.7% reading in 2025.
These are, however, slower than the central bank’s projected 6.4% and 4.5% inflation for the next two years.
As of June, Philippine inflation stood at 4.8%, with the headline print remaining above target for four months in a row.
On the other hand, Pantheon Macroeconomics downgraded its inflation forecast to 5.2% from 5.5% for 2026 and to 3% from 3.2% for 2027.
This came after June inflation came in softer than market expectations at a three-month low of 6.4% amid easing pressures from food and fuel prices.
“We continue to believe that the postwar surge in the headline rate is in the rear-view mirror, and that a sustained spell of disinflation should take it back within the BSP’s 2-to-4% target range by March next year at the earliest, barring any unexpected shocks, externally or domestically,” Pantheon Macroeconomics Chief Emerging Asia Economist Miguel Chanco and Asia Economist Meekita Gupta said in a separate report on Wednesday.
Mr. Chanco and Ms. Gupta said the slowing inflation could prompt the BSP to cut its tightening cycle short with a likely pause in August.
The Monetary Board began to hike its policy rate in April as a preemptive measure to contain inflation risks from the energy crisis.
It delivered a second straight rate increase in June, bringing its total hikes to 50 basis points (bps). The benchmark rate now stands at 4.75%.
BSP Governor Eli M. Remolona, Jr. has said that the economy can still absorb another 25-bp rise as they expect growth to start rebounding in the second half.
“The Board is banking on fiscal policy to cushion the impact of higher rates on economic growth; specifically, a revival in public infrastructure spending, after it was hammered by last year’s anti-corruption drive,” Mr. Chanco and Ms. Gupta said.
“But our chart below highlights that such expenditure is still collapsing; it fell in April — the latest data — to its lowest level since the pandemic, after seasonal adjustment,” they added.
The latest government data showed that its spending inched up by 4.81% to P2.6 trillion as of May from P2.48 trillion a year earlier. This was slower than the 9.71% growth seen in the same period last year.
