Philippines cuts GDP growth outlook for this year

By Justine Irish D. Tabile, Senior Reporter

THE PHILIPPINE ECONOMY may grow by just 3.5%-4.5% this year, well below the government’s initial 5%-6% target, as underspending and the fallout from the US-Iran war dampen economic activity, the Department of Economy, Planning, and Development (DEPDev) said on Monday.

“We expect that the situation will improve in the second half,” DEPDev Secretary Arsenio M. Balisacan said in an interview on Money Talks with Cathy Yang on One News.

“We hope to achieve at least, in 2026, 3.5% to 4.5% with all these changes.”

The Development Budget Coordination Committee is expected to officially release its revised macroeconomic assumptions this week.

Mr. Balisacan said government spending is expected to accelerate in the second half after expenditure growth slowed to 4.8% in the first quarter from 18.7% a year ago.

“Underspending alone contributed to almost like one percentage point… Our growth in the first quarter would have been 3.8% instead of 2.8% if the spending did move as we expected,” he said.

“The second quarter is still a little problematic in the sense that we still see some lag effects of the previous quarter and the last half of last year’s effect coming in,” he added.

Underspending as well as oil shocks amid the Middle East war led to a weaker-than-expected growth for the Philippines, which saw its gross domestic product  expand by 2.8% in the January-to-March period from 3% in the previous quarter and 5.4% a year ago.

“The sharp contraction in the first quarter and the sharp inflation that followed the Middle East conflict is not our making. Those are external forces,” he said.

Inflation has been above the Bangko Sentral ng Pilipinas’ (BSP) 2%-4% goal since the Middle East war erupted in late February, with the year-to-date headline print now at 4.5%.

However, Mr. Balisacan said the external factors were compounded by domestic challenges, particularly last year’s corruption scandal that linked government officials, lawmakers, and contractors to substandard or nonexistent flood control projects.

“But we are moving forward with that. The government has put in place measures to make sure that those are not persistent pressures,” he said, noting that the root of the problem is weakened institutions.

“We have to improve and recover trust and confidence in public policy and government. That is where we have been very much preoccupied in the last couple of months to ensure that accountability is back,” he added.

The DEPDev chief said restoring business and consumer confidence in the country’s processes and governance will help attract more investments.

While growth is expected to improve in the second half, Mr. Balisacan said keeping inflation under control remains a key challenge. He warned that prolonged price pressures could hurt growth and worsen poverty.

“The sharp increase in inflation is a serious problem, both in the short term and in the longer term but what we must ensure is that it does not become a persistent issue as persistence has to do with expectations,” he said.

“While we are equipped to sustain growth, if we are unable to get those expectations aligned with what government wants, particularly in the case of the Bangko Sentral ng Pilipinas (BSP), what the inflation target is, then we will not be able to achieve either high growth or poverty reduction,” he added.

The BSP sees the headline inflation settling at 6.4% this year, 4.5% in 2027, and 3.1% in 2028.

Mr. Balisacan also expressed support for the BSP’s recent decision to raise benchmark interest rates by 25 basis points (bps), saying the move was based on broad economic considerations.

The BSP raised its key rate by 25 bps to 4.75%, matching the benchmark rate set in October 2025. This was the highest rate in nearly a year or since the 5% in August last year.

Sought for comment, Francisco Cid L. Terosa, an associate professor and former dean of the School of Economics of the University of Asia and the Pacific, said economic growth this year will be heavily influenced by external events as well as “internal governance issues, domestic inflation, weather disturbances, lethargic investments, and slower infrastructure development.”

Mr. Terosa told BusinessWorld that growth in the next quarters will be driven by supportive fiscal policies and resilient domestic consumption.

“Greater infrastructure spending can trigger multiplier effects on production, income, and employment, which can fuel domestic consumption,” he said.

“Another driver would be the truce between the US and Iran, which can create catalytic effects on business expansion and investment plans, as it can help weaken inflationary pressures, open supply chains, and revitalize trade and commerce,” he added.