THE Philippines could slip into a recession if inflation accelerates further due to the war in the Middle East, oil supply disruptions and worsening food price pressures, MUFG Research said.
In a report, MUFG noted that the Philippines remained one of the more vulnerable economies in the region because of its heavy dependence on crude oil imports from the Middle East.
“The Philippines is vulnerable not only because of its high dependence on the Middle East’s crude oil, but also the weak starting point of growth pre-dating the Iran War,” it said.
Factors unrelated to geopolitical tensions such as fiscal tightening and the lingering effects of the flood control project controversy have compounded the impact of rising oil prices and inflationary pressures, MUFG continued.
It said that under an adverse scenario, inflation could accelerate to 7.5 percent while a severe scenario involving major oil supply disruptions and shortages could drive it to as high as 10 percent.
MUFG warned that such extreme inflation could sharply slow economic activity and potentially trigger a recession.
“Associated supply shortage would imply a much-decelerated growth, even a recession in a severe scenario,” it said.
A recession is a significant slowdown in economic activity that lasts for several months or longer. It happens when consumers spend less, businesses cut production or investments and overall economic growth weakens.
Gross domestic product (GDP) markedly slowed to 2.8 percent in the first quarter, sharply lower compared to 5.4 percent a year earlier. It was the slowest growth recorded since the first quarter of 2021 when it contracted by 3.8 percent.
The government has blamed the weak growth on the Middle East conflict, a multibillion-peso flood control project scandal and the delayed approval of the national budget.
Inflation also spiked to a three-year high of 7.2 percent last month, which the government called a “major factor” leading to lower economic growth.
MUFG said inflationary pressures in the Philippines were significantly stronger than expected amid rising domestic rice prices, higher fuel costs and broader spillover effects.
It raised the consumer price growth forecast for 2026 to 6.0 percent to account for elevated oil price assumptions and second-round effects on food prices.
Risks remain skewed to the upside, MUFG said, due to the possibility of a Super El Niño event later this year that could disrupt agricultural production and further drive up food costs.
Further tightening
MUFG said extreme inflation was likely to force the Bangko Sentral ng Pilipinas (BSP) to maintain an aggressive tightening stance even at the expense of economic growth.
It expects the central bank, which ended an easing cycle last month by implementing a 25 basis point (bps) rate hike, to raise by another 75 bps, bringing the policy rate to 5.25 percent.
The hikes are likely to come “earlier rather than later,” MUFG said.
The central bank is seen remaining focused on containing inflation expectations and stabilizing the peso as rising prices continue to threaten consumer spending and business activity.
Higher borrowing costs and tighter financial conditions are expected to weigh heavily on domestic demand, with growth projected to slow to around 3.5 percent this year.
While government spending may gradually improve, meanwhile, MUFG said this would likely be offset by the delayed effects of higher inflation and rising interest rates.
The peso is likewise expected to stay under pressure amid external risks and inflation concerns.
Under a base case scenario, the peso is projected to trade between P60.50 and P61.50 against the dollar this year while riskier scenarios could push the rate beyond P62.
