Economic growth slows in the second quarter of 2026

Fourth consecutive slowdown disappoints markets: The Philippines' GDP grew 2.3% in annual terms in Q2, following 2.8% growth in the previous quarter. Q2's reading was the weakest since Q1 2021 and fell short of market expectations of a modest acceleration. In seasonally adjusted quarter-on-quarter terms, economic output increased 0.6% in Q2, following 0.9% growth in the prior quarter.

Investment crunch and private spending slump cap GDP growth: Compared to the previous period's data, figures in Q2 worsened for private consumption (+2.8% in annual terms vs +3.0% in Q1), fixed investment (-13.7% vs -2.5% in Q1) and imports of goods and services (+5.5% vs +6.8% in Q1). In contrast, readings strengthened for government consumption (+8.3% vs +4.8% in Q1) and exports of goods and services (+12.2% vs +7.8% in Q1). Domestic demand growth almost ground to a halt in the quarter, reflecting the Iran energy crisis, which affects the Philippines more than regional peers due to its heavier reliance on energy imports from the Middle East. Above-target inflation and one of the highest interest rates in ASEAN curbed momentum in private spending, as households reduced discretionary spending. Moreover, fiscal tightening and weak investor sentiment weighed on capital outlays, particularly in construction. On a brighter note, net exports lifted overall GDP growth by over one percentage point, following Q1’s negative contribution, supported by a faster rise in goods shipments and moderating import growth.

GDP growth to be underwhelming in the rest of 2026: GDP growth is likely to remain downbeat in H2 and trail its average prior to both the Iran war and 2025’s corruption scandal, with the latter still weighing on the investment landscape. Our panelists project inflation to average above target in the remainder of the year, fanned by high energy costs and a weak peso. Coupled with expected interest rate hikes, this should keep a lid on domestic demand. Additionally, some panelists see limited gains to exports from the global AI boom, partly reflecting surging input costs. Somewhat more positively, the government is likely to catch up on large infrastructure spending later this year, which should provide a tailwind to investment and construction, though risks are tilted to the downside amid policy uncertainty.

Panelist insight: Nomura’s Euben Paracuelles and Nabila Amani commented: “Taking into account the Q2 outturn, we reduce our full-year 2026 GDP growth forecast to 3.8%, within the latest government forecast range of 3.5-4.5%. […] The government is likely to prioritize catch-up spending of infrastructure projects for the rest of the year. […] Still, we continue to acknowledge high uncertainty over the extent of the pickup, in part due to rising political uncertainty with the ongoing impeachment trial of Vice President Sara Duterte, which could prove to be a distraction and weigh further on business sentiment. Externally, a more durable resolution in the Middle East conflict remains uncertain, and the AI-related boost to electronics exports in the Philippines may remain limited.”

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