The country’s economic growth may fall below 3 percent in the second quarter of the year due to tepid domestic consumption and sluggish investment inflows, according to economists from the University of Asia and the Pacific (UAandP).
‘We estimate Q2-2026 gross domestic product [GDP] growth at 2.6 percent, with consumption and investment likely weighed down by recent headwinds,’ UAandP economists said in the latest The Market Call report.
Philippine GDP expanded by 5.5 percent in the second quarter of 2025, according to data from the Philippine Statistics Authority (PSA).
PSA data also showed that the economy expanded by 2.8 percent in the first quarter of 2026, the weakest GDP growth since the 3.8-percent contraction recorded in the first quarter of 2021 at the height of the pandemic. Excluding the pandemic years, it was the slowest expansion since the fourth quarter of 2009, when the economy grew by 1.8 percent.
The report noted that while the economy is showing early signs of recovery, the outlook remains uncertain as inflationary pressures remain elevated and domestic demand continues to weaken.
Based on PSA data, household consumption-long considered the main driver of the Philippine economy-slowed further to 3 percent in the first quarter of 2026 from 5.3 percent in the same period last year.
The PSA said this was the slowest household spending growth since the 4.8 percent contraction recorded in the first quarter of 2022 during the pandemic. Excluding the pandemic years, it was the weakest since the third quarter of 2010, when household spending grew by 2.6 percent.
On inflation, UAandP said consumer prices are likely to remain elevated for the rest of the year despite easing tensions in the Middle East, citing second-round effects and the potential impact of a Super El Niño.
‘We see underlying price pressures in tertiary sectors, where inflation pass-through tends to be lagged, along with a looming Super El Niño season threatening to raise food prices,’ the report said.
UAandP economists said second-round effects continue to build underlying inflationary pressures as businesses in service industries, such as restaurants and accommodation, and personal care, increasingly pass on higher operating costs to consumers through higher prices.
The report also noted that core inflation-which strips out volatile food and energy prices-stood at 4.1 percent in May, suggesting that broader price pressures are becoming more entrenched beyond temporary supply shocks.
Given these headwinds, UAandP expects the Bangko Sentral ng Pilipinas (BSP) to raise its policy rate by another 50 basis points this year.
‘Risks of an off-cycle hike diminished with the softer inflation reading, but the BSP remained hawkish at its latest policy conference,’ it said.
Last month, the Monetary Board raised its key policy rate by 25 basis points for the second time this year.
The BSP said the move was intended to keep inflation expectations anchored and mitigate the risk of second-round effects.
Inflation watch
The BSP said the wage hike in the National Capital Region will be tabled during the August rate-setting meeting of the Monetary Board.
In a message sent to the BusinessMirror on Wednesday, the central bank said: ‘The approved increase will be considered at the BSP’s upcoming monetary policy meeting in August, together with other incoming economic data.’
The BSP told this newspaper that its latest inflation forecasts already took into account a ‘smaller wage adjustment,’ but it opted not to disclose the amount yet.
‘The BSP remains vigilant about inflation. Monetary policy decisions will continue to be guided by incoming data and the evolving inflation outlook,’ the central bank also told this newspaper.
The central bank pegged the average inflation forecast at 6.4 percent for 2026 and 4.5 percent for 2027. These projections do not yet take into account the full amount of the recent wage hike approved by the NCR wage board.
The BSP also told this paper that it ‘stands ready to take the appropriate policy action, as needed, to help steer inflation back to its 3-percent target over the policy horizon.’
Jonathan L. Ravelas, senior adviser at Reyes Tacandong and Co., told the BusinessMirror that the P85 wage hike ‘will nudge inflation higher roughly by about 0.2 to 0.4 percentage points over the next year driven by higher labor costs and stronger consumer spending from low-income households.’
‘But it’s not a shock to the system, it’s manageable,’ Ravelas told this newspaper in a Viber message on Wednesday.
For the BSP, he said this doesn’t change the direction of policy. However, he said: ‘It does affect the pace.’
According to Ravelas, this recent wage hike ‘reinforces a more cautious, data-dependent approach’ for the central bank.
However, from a market perspective, he explained that this recently approved wage hike is a ‘short-term boost to consumption.’
He said the key risk to watch is ‘whether broader wage pressures emerge and start feeding into a sustained inflation cycle.’