THE Philippine economy remains under strain and a recovery is expected to face further pressure from inflation and other headwinds, analysts said after second-quarter growth came in at a lower-than-expected 2.3 percent.
The result, which was well below the government’s downwardly revised 3.5- to 4.5-percent target for the year, was the slowest since a contraction during the pandemic.
Officials said the lower end of the 2026 goal remained achievable, but growth will have to markedly improve to an average of at least 4.4 percent in the second half of the year.
“The Philippines is likely to face challenges from elevated inflation and external headwinds in the future,” ANZ Research said following Friday’s release of second-quarter growth data.
“Public infrastructure capital outlays have been declining since July 2025, constraining capital accumulation and construction activity,” it added.
Gross capital formation — a measure of investments — contracted by 9.2 percent, worsening from the first quarter’s -3.1 percent and reversing from the 0.9-percent growth in the second quarter of 2025.
Bank of the Philippine Islands (BPI) lead economist Emilio Neri Jr. said weak investment spending could weigh on future growth if businesses and the government continue to hold back on capital expenditures.
“Investment spending remained the main source of weakness in the economy,” Neri said, adding this was not limited to construction.
Spending on durable equipment contracted by 13.6 percent in the second quarter as firms not only delayed construction activity but also scaled back purchases of machinery and transport equipment.
Road transport equipment spending fell 28.4 percent, which Neri said likely reflected the combined impact of elevated fuel costs and weaker demand conditions on vehicle purchases.
Spending on mining and construction machinery plunged 42.7 percent as construction companies reduced their equipment purchases.
Neri said a prolonged weakness in investment was concerning because its impact would extend beyond the immediate slowdown in economic activity.
“If investment spending remains weak due to elevated inflation, policy uncertainty and softer demand conditions, the economy could emerge from the current slowdown with a lower growth potential than before,” he said.
A sustained decline in investment could eventually limit the economy’s ability to expand its output, Neri continued, making the investment slowdown a risk not only to near-term growth but also to the country’s longer-term economic capacity.
BSP seen hiking despite weak growth
Neri said the Bangko Sentral ng Pilipinas (BSP) may need to raise its policy rate further in response to inflation risks despite the subdued economy.
“A potential rebound in economic growth in the second half of the year may allow BSP to place greater emphasis on anchoring inflation expectations,” he added.
Capital Economics also said that it expected the BSP to raise the policy rate by another 25 basis points at its Aug. 27 meeting before ending a tightening cycle.
The research firm said that while the continued weakness of the economy had made the case for further rate hikes “less clear-cut,” inflation remained elevated enough to warrant another increase.
“The weakness of the economy is likely to influence the thinking of the central bank as it weighs its next move,” it said.
“But with inflation still well above target, we are sticking with our view that the BSP will hike rates by a final 25bps at its next meeting later this month.”
Inflation slowed for a third straight month in July, hitting 6.2 percent after it peaked at 7.2 percent in April. It remained, however, well above the BSP’s 2.0- to 4.0-percent target range.
The BSP has so far raised key interest rates twice this year as inflation surged in the wake of the war in the Middle East.
“Higher inflation eats into the purchasing power of consumers, dragging on demand,” Capital Economics said, presenting a dilemma for the central bank as further rate increases could add to pressure on consumption and investment.