THE Philippine economy is beginning to show signs of stagflation as slowing growth, elevated inflation, and weakening labor market conditions increasingly converge, HSBC Global Research said.
“All told, stagflation in the Philippines has taken shape,” HSBC Global Research senior economist Aris Dacanay said in a commentary on Thursday.
Dacanay said their previously outlined “adverse scenario” for the Philippines is now “merging with reality,” prompting the bank to sharply downgrade its growth forecasts while significantly raising its inflation projections for 2026 and 2027.
“With stagflation risks becoming apparent, we adjust our baseline forecasts to be closer to our ‘adverse’ scenario,” Dacanay said.
HSBC cut its gross domestic product (GDP) growth forecast for the Philippines to 3.4 percent this year from its earlier estimate of 4.6 percent. For 2027, growth is now projected at 4.1 percent from the previous 4.8 percent.
The revised outlook came after the Philippine economy expanded by just 2.8 percent in the first quarter of 2026, far below market expectations and significantly slower than the 5.9-percent growth recorded in the same period last year.
Dacanay said the slowdown was driven by weak government spending, softer household consumption, and deteriorating external demand amid global economic uncertainty.
At the same time, inflation risks have intensified as consumer price growth accelerated to 7.2 percent last month amid the lingering Middle East war.
HSBC raised its average inflation forecast for 2026 to 6.6 percent from 3.3 percent previously, while its 2027 projection was revised upward to 4.4 percent from 3.5 percent.
Dacanay said the sharp increase in oil prices, rising rice costs, and broader supply-side disruptions were fueling inflationary pressures across the economy.
“Apart from the Hormuz chokepoint affecting the supply of oil, it also affected the supply of fertilizer,” Dacanay said.
“This should then take a toll on agricultural yields in H2 (second half) 2026, exacerbating the effects of the incoming El Niño season and keeping food prices high,” he added.
He also pointed to emerging labor market weakness as another sign of mounting stagflation risks.
While unemployment slightly eased in recent months, HSBC said underemployment remained elevated, indicating that many Filipinos were still struggling to find sufficient and quality work amid slowing economic activity.
“As unemployment in Q1 (first-quarter) 2026 rose above 5.0 percent, the medium-term effects of the growth and inflation shocks are already apparent,” Dacanay said.
Dacanay warned that weaker domestic demand, combined with higher borrowing costs and elevated prices, could further dampen consumption and investment moving forward.
Given the worsening inflation outlook, HSBC expects the Bangko Sentral ng Pilipinas to adopt a more aggressive monetary tightening stance.
The bank now forecasts the BSP raising benchmark interest rates by 150 basis points this year, bringing the benchmark policy rate to 6 percent by end-2026.
HSBC said the central bank could begin accelerating rate hikes as early as its June policy meeting following the unexpected surge in April inflation.
“Monetary policy is in a better position to address the spillover effects of higher energy and food prices on inflation expectations. In fact, price stability is the BSP’s main policy fabric,” Dacanay said.
“The central bank has the tools, through its monetary operations, to ensure that a wage-price spiral never comes out of its cage,” he added.
However, Dacanay cautioned that tighter monetary policy alone may not be enough to address supply-driven inflation pressures, especially those linked to global oil markets and food supply disruptions.
“The easiest way to bring growth back on track is to ensure that fiscal policy is back on track,” Dacanay said.
“Policymakers can do this by fast-tracking infrastructure projects that have already broken ground and have passed the stage of scrutiny,” he added.
