Headwinds cloud Philippines economy in H1

Corruption fallout, Mideast conflict force government to temper growth outlook

MANILA, Philippines — Challenging. That was how the first half unfolded for the economy, marked by slower growth and higher inflation amid domestic and external headwinds.

“The first half of 2026 has been challenging,” Department of Economy, Planning and Development Secretary Arsenio Balisacan said, citing a combination of domestic and external shocks that slowed growth and pushed inflation higher.

But even before 2026 started, the Philippines was already contending with headwinds after massive corruption in the government’s flood control projects was exposed last year.

The controversy hit both consumer and investor confidence and also led to a slowdown in infrastructure spending, prompting the government to cut its growth targets for this year and the next in December last year.

In particular, the Development Budget Coordination Committee lowered the 2026 gross domestic product (GDP) target to five to six percent from its previous goal of six to seven percent.

The government also downscaled its 2027 growth target to 5.5 to 6.5 percent from the previous goal of six to seven percent.

Before the economy could even regain its footing, it was hit by a massive external shock as the war involving the United States, Israel and Iran broke out in the Middle East on Feb. 28. This triggered the declaration of a national energy emergency in the Philippines.

As the country relies heavily on imports for its energy needs, the Philippines was hit harder by the oil price shock stemming from the Middle East conflict than its neighbors in the region. This was felt in the domestic market through a surge in fuel prices, which pushed up other costs, including food and logistics and severely strained households.

As a result, first quarter gross domestic product growth slowed to 2.8 percent, the weakest pace in five years, with the flood control scandal and higher inflation both weighing on business and consumer confidence.

Balisacan said that the second quarter was also a challenging period for the economy, as this was the peak of the Middle East conflict.

The continued effect of the dual challenges, such as the flood control issue and the Middle East conflict, led to another downgrade on the country’s growth target to just 3.5 to 4.5 percent for this year.

For 2027 to 2030, the government also downgraded its growth target to five to six percent.

University of Asia and the Pacific economist Marco Antonio Agonia said that the downscaled growth goal for this year is more achievable amid ongoing economic headwinds.

“The recent twin shocks of the flood control scandal and the Middle East war have highlighted the country’s structural weaknesses, especially with its over-reliance on consumption-driven growth,” he said.

Amid high inflation and expectations that El Niño will intensify, he said consumption is weakening as the economy’s main growth engine.

While inflation eased further in June to 6.4 percent from the previous month’s 6.8 percent, it remained elevated and above the Bangko Sentral ng Pilipinas’ two to four percent target band for the year.

For the first half, inflation averaged 4.8 percent, also higher than the target.

Income upgrade no guarantee of better lives

High prices have taken a toll on consumers like transport network vehicle service   driver Roderick Aboga, who now has to work longer hours.

Prior to the energy crisis, Aboga typically worked 12 hours and took home P1,500 a day after deducting fuel costs, the ride-hailing platform’s commission and other expenses.

These days, he is on the road for 16 hours, earning only P800 to P1,000 a day.

“Gasoline prices are high and so are commission fees,” he said.

He said commuters, who are also trying to cut costs, are making fewer bookings.

The situation on the ground provides context for why many Filipinos say they do not feel the difference from the country’s recent upgrade to upper-middle income status, based on the World Bank’s new income classification released on July 1.

The World Bank said that the Philippines’ move to the upper-middle income club, after being stuck in the lower-middle income group for nearly four decades, reflects the economy’s broad-based expansion, with GDP growing at an average of 5.8 percent per year from 2021 to 2025 and all major industries posting gains.

GlobalSource Partners country analyst Diwa Guinigundo said that while the upper-middle income status is a significant milestone, its significance should not be overstated.

He said the upgrade does not mean that the Philippines has become a developed economy or that most Filipinos now have higher standards of living.

“The new classification reflects an average level of national income, but averages often conceal large disparities across regions, sectors and households,” he said.

He also said that many Filipinos continue to face limited access to quality education, health care, infrastructure, employment and economic opportunities.

For Ateneo de Manila University assistant professor of economics Ser Percival Peña Reyes, the milestone reflects the urgent need for productivity-driven reforms, such as enhancing digital adoption and reducing business costs, to ensure the country avoids a middle-income trap and that average national income translates into inclusive growth for all Filipinos.

For Agonia,  other reforms are also needed to sustain the country’s growth momentum and move beyond middle-income status.

“Pursuing policies that improve the ease of doing business, cultivating human capital and raising the country’s growth potential are essential for translating headline gains into grassroots improvements,” he said.

Balisacan said that the income upgrade is a milestone, but not a destination.

Instead, it marks the start of another stage in the country’s development journey and a call to aim for higher growth.

Balisacan said the country must go beyond sustaining growth of five to six percent.

After a challenging first half, he said the economy has to grow at a faster pace in the second semester.

To achieve the lower end of the new growth target for the year, he said the economy needs to grow by at least 3.7 percent in the next three quarters.

Rizal Commercial Banking Corp. chief economist Michael Ricafort said that catch-up spending, along with anti-corruption measures and other reforms, would improve investor confidence and help boost economic growth.

“If anti-corruption measures and other related priority reforms that further level up governance standards were taken seriously, these would be the missing and remaining important catalysts that would help improve investor confidence or sentiment that, in turn, would also lead to more investments,” he said.

He added that this would create more jobs, promote business and economic activities, and support further gains in the local financial markets.

To grow faster, Balisacan said the government is focused on restoring confidence, shielding households from price increases and external shocks, enhancing long-term productivity and competitiveness, and strengthening institutions and governance.

“These priorities reinforce one another. Together, they will help us build an economy that grows faster, withstands shocks better and creates more opportunities for every Filipino,” he said.