A MARKED first-quarter growth slowdown has raised concerns about the Philippine economy’s prospects given headwinds such as surging inflation and the war in the Middle East.
Preliminary data released on Thursday showed gross domestic product (GDP) growth of just 2.8 percent for January-March, down from 3.0 percent three months earlier and well below the 5.0- to 6.0-percent target for 2026.
It was also lower than the 3.3-percent median in a Manila Times poll of economists and the slowest expansion since the Covid-19 pandemic.
The government blamed the result on the lingering effects of last year’s massive flood control project scandal, budget delays that had slowed the rollout of programs and projects, and fallout from the US-Israel war on Iran.
‘Really very bad’
Business groups expressed alarm and again called for urgent reforms.
“[T]his is really very bad,” Philippine Exporters Confederation Inc. (Philexport) President Sergio Ortiz-Luis Jr. told The Manila Times.
He called on the government to improve the ease of doing business in the country as “investors are shying away from us,” with key economic drivers such as tourism also feeling the pinch.
The Makati Business Club (MBC) said the country was again being reminded of the urgent need for reforms and urged the government to ensure transparency, accelerate structural reforms, invest in food and energy security and infrastructure, and create a more stable and competitive environment for businesses and investors.
“We should seize this moment to pursue meaningful changes that strengthen governance, improve policies, simplify and streamline processes, curb corruption, foster innovation, and build a more resilient and investment-friendly economy,” MBC Chairman Edgar Chua said in a statement.
Donald Lim, president of the Management Association of the Philippines, said the slowdown was a clear sign that both businesses and households are becoming more cautious amid higher costs and ongoing uncertainty.
“Many companies are responding by tightening expenses, delaying expansion plans, improving operational efficiency, and becoming more selective in hiring and investments. While larger firms may be able to absorb slower demand, MSMEs (medium, small and micro enterprises) are likely feeling the pressure more significantly,” he told The Manila Times.
“Government can help by accelerating infrastructure and public spending, reducing bureaucratic delays, improving the ease of doing business, and giving companies greater flexibility in areas such as hybrid work and digital operations,” Lim added.
“At this stage, restoring business and consumer confidence will be just as important as stimulating growth itself.”
Stagflation feared
Economists, meanwhile, warned of possible stagflation — a combination of low growth, high unemployment and high inflation.
“The Philippines is facing a twin-crisis squeeze, with economic growth already weakened by the flood control controversy and now further strained by surging oil and food prices, as we face a stagflation scenario — high inflation alongside weak growth,” Chinabank Research said.
“This trend will likely persist throughout the year,” it added.
Chinabank Research said the slowdown placed the Bangko Sentral ng Pilipinas (BSP) in a difficult situation where it would need to contain inflation pressures without further weakening economic activity.
“The BSP, although faced with high inflation, will have limited room to increase its policy rate as excess demand seems to be absent,” it said.
Chinabank added that the central bank, which raised its policy rate by 25 basis points last month as inflation surged, may only be able to deliver up to two 25-basis-point rate hikes mainly to prevent inflation expectations from becoming entrenched into 2027 while still trying to keep policy supportive of growth.
ANZ Research said the country’s macroeconomic environment remained “challenging,” characterized by sluggish growth, elevated inflation and a weak external position.
It warned that risks to the near-term outlook remain tilted to the downside, particularly if geopolitical conditions worsened further or inflation stayed elevated for a prolonged period.
ANZ noted that the biggest drag on growth was from household consumption, which slowed for a fourth straight quarter to 3.0 percent from 3.8 percent three months earlier. It added that the situation is unlikely to improve significantly in the near term as inflation continues to pressure real incomes.
“Household spending is likely to face additional pressure as rising inflation erodes real incomes and forces cutbacks in discretionary consumption,” ANZ said.
Consumer price growth spiked to a three-year high to 7.2 percent in April amid higher transport and energy costs and the BSP expects it to breach the 2.0- to 4.0-percent target this year and the next.
Most analysts expect inflation to increase further in the coming months, which could then prompt the central bank to tighten policy rates. However, Pantheon Macroeconomics economist Miguel Chanco said the Q1 slump would make the BSP reluctant to hike further.
“The Q1 reading was much weaker than we expected, so we’ll be downgrading our 4.8-percent full-year growth forecast for 2026,” he said.
“It nonetheless supports our view that additional BSP rate hikes aren’t a given to combat what is mainly a supply-side price shock, given the significant weakness of the economy,” he added.
Sectoral risks
Manny Ocampo, president and chief operating officer of Investment & Capital Corporation of the Philippines, said the combination of persistent inflation, a weak peso, and the prospect of further rate hikes had raised risks for several domestically sensitive sectors.
He flagged property development, consumer lending, construction linked to real estate, firms with significant foreign exchange exposure, and consumer discretionary businesses as the most vulnerable.
“Despite the challenges, infra-renewable energy, consumer staples, and big banks should be relatively stable,” Ocampo added.
DragonFi Securities Inc. analyst Jarrod Tin warned that stagflation risks could persist if global oil prices remained elevated and also pointed to emerging stress in the banking sector.
“We are wary of the banks, which are already seeing an uptick in nonperforming loans and a corresponding increase in provisions,” he said, adding that slower loan growth could further dampen earnings momentum across the sector.
Rizal Commercial Banking Corp. chief economist Michael Ricafort said first-quarter slump reflected a broad-based slowdown driven by weaker consumption and investment activity.
He also cited the impact of higher global oil prices, a weaker peso and elevated inflation expectations and warned that all these could lead to second-round inflation effects, further eroding household purchasing power and weighing on overall demand.
Despite the headwinds, Ricafort said there were some offsetting positives, including stronger export performance and higher state spending.
A “catch-up” spending plan by the government, along with ongoing governance and anti-corruption reforms, could improve investor sentiment in the coming quarters, he said.
Traders and investors appeared to have shrugged off the first-quarter growth surprise, with the peso gaining 88.5 centavos to P60.42 versus the dollar and the benchmark Philippine Stock Exchange index ending Thursday up 1.12 percent, or 67.06 points, to 6,034.27.
