Q2 growth outlook remains weak

By Justine Irish D. Tabile, Senior Reporter

PHILIPPINE gross domestic product (GDP) likely remained below the government’s 5-6% growth target in the second quarter as higher oil prices and tighter financial conditions continued to dampen domestic demand, analysts said. 

This as the Development Budget Coordination Committee is set to meet this week to review its macroeconomic assumptions following the weaker-than-expected first-quarter performance.

“We expect second-quarter GDP growth to grow moderately between 3% and 3.2% year on year as higher oil prices and tighter financial conditions continue to weigh on domestic demand,” Maybank Investment Bank economist Azril Rosli told BusinessWorld.

Marco Antonio C. Agonia, an economist at the University of Asia and the Pacific (UA&P), said that he expects “similar, sub-3% growth in the second quarter with traditional growth drivers still under siege.”

If realized, the second-quarter GDP would be slower than the 5.44% growth in the same period in 2025.

However, it could be slightly faster than the 2.8% GDP expansion in the first quarter of 2026, which was the slowest print in five years.

“The bulk of public infrastructure spending will likely only return by the second half of the year, which immediately drags investment formation,” said Mr. Agonia.

Government spending grew by 4.8% in the first quarter, much slower than 18.7% a year ago but faster than the 0.7% growth in the fourth quarter.

Meanwhile, gross capital formation — the investment component of the economy — contracted by 3.3% in the first quarter, a reversal of the 4.5% growth a year ago. Still, this was an improvement from the 9.4% decline in the fourth quarter.

“Household consumption is likely to stay soft as rising transport, food, and utility costs erode purchasing power, while investment activity remains constrained by elevated borrowing costs and ongoing infrastructure implementation delays,” said Mr. Rosli. 

Household final consumption expenditure — a key driver of the economy — grew by 3% in the first quarter, the slowest pace since the 4.8% contraction in the first quarter of 2021.

Excluding the pandemic, this was the slowest growth in consumption since 2.6% in the third quarter of 2010.

“Key downside risks include a further escalation in geopolitical tensions, sustained Brent crude prices above $110 per barrel, broader second-round inflation effects, and the possibility of more aggressive BSP tightening,” Mr. Rosli added.

Inflation accelerated to 7.2% in April, breaching the Bangko Sentral ng Pilipinas’ (BSP) 5.6%-6.4% forecast for the month.

The BSP has signaled more rate hikes to keep inflation in check after the April print exceeded expectations. Last month, the central bank delivered its first 25-basis-point rate hike in two and a half years, bringing the benchmark policy rate to 4.5%.

“Compounding the issue, the effects of the Middle East war will be felt harder in the second quarter, with all months within it experiencing the brunt of the oil shock and its second-round effects,” said Mr. Agonia.

“Higher inflation and supply disruptions will weigh on consumer and business confidence, dampening spending appetite,” he added.

Following the sluggish first-quarter GDP performance, Fitch Solutions unit BMI slashed its 2026 Philippine GDP growth forecast to 4.2% from 4.7%, while Capital Economics cut its projection to 3% from 3.5%. Pantheon Macroeconomics likewise lowered its estimate to 4% from 4.8%.

SILVER LINING
Finance Secretary Frederick D. Go last week said that the government will boost spending to revive the economy, and downplayed stagflation risks.

“The economic team is totally optimistic that once the war in Iran is over, the growth of our economy will resume its previous path. So, that means we’re looking at the mid 5% levels as soon as all these uncertainties are over,” Mr. Go told Bloomberg News.

Mr. Go also noted that foreign companies are still interested in setting up operations in the Philippines.

“The interest to invest in the Philippines is at an all-time high,” he said. “I don’t think we will have stagflation.”

Mr. Agonia said infrastructure spending could help drive growth in the succeeding quarters.

“The largest bright spot we see would be the resurgence of infrastructure spending by the second half of this year,” he said.

Last week, Department of Economy, Planning, and Development Secretary Arsenio M. Balisacan said that he expects government spending and project implementation to accelerate in the coming months as agencies operationalize their catch-up programs.

A corruption scandal involving flood control projects had stalled government spending, and dampened consumer and investor confidence. Mr. Baliscan had said the lingering effects of the scandal continued to be seen in the first-quarter economic data.

For Maybank’s Mr. Rosli, services activity, remittance inflows, tourism recovery, and resilient electronic exports will continue to support the economy.

“In particular, the ongoing global artificial intelligence (AI)-driven semiconductor upcycle could become a meaningful upside driver for Philippine exports given that electronic products account for 54% of total exports,” he said.

“Export growth remained relatively strong at 7.8% year on year in the first quarter despite weaker domestic conditions, supported partly by semiconductor-related demand,” he added.

This growth was driven by a 13.3% expansion in goods exports and a 3% increase in services exports.

However, Mr. Agonia said that although exports could provide a minor favorable tilt, “downside risks in the form of logistics disruptions and a softer global demand outlook are rising.”

“We note that volatility in the peso-dollar rate is shaking exporters’ confidence, constraining solvency and raising input costs,” he said.

Still, Mr. Agonia said that AI-related semiconductor demand could be “one of the few green shoots in the Philippines’ growth picture, with robust performance despite global headwinds.” 

“This may be an opportune time for the Philippines to move up the electronic product value chain and seek out more enduring growth drivers,” he added.