The Philippine economy expanded by a disappointing 2.3% in the second quarter, a significant slowdown from the 5.4% growth recorded in the same period last year. This marks the slowest pace of economic expansion since the pandemic and falls short of both government targets and analyst expectations. The Department of Economy, Planning, and Development (DEPDev) cited the ongoing Middle East conflict, which has led to soaring oil prices, and the lingering effects of a corruption scandal as primary reasons for the sluggish growth. The first-quarter GDP growth was also revised to 2.8% from an initial 3%.
Key factors contributing to the weak performance include a significant drop in government construction, which fell by 31.5%, and a contraction of 3.3% in gross capital formation. Household consumption also continued its downtrend. Inflation averaged 2.8% in the first three months of the year, driven by rising prices for fuel, electricity, and food. Analysts like Gareth Leather of Capital Economics noted that the flood control corruption scandal was a main cause of the weakness, impacting consumer and business sentiment.
The Central Bank of the Philippines (BSP) has responded to inflationary pressures by signaling further rate hikes, having already delivered a 25-basis-point hike to bring the benchmark policy rate to 4.5%. This puts the central bank in a difficult position, as some economists, like Deepali Bhargava of ING, describe the situation as one of stagflation—a combination of slow growth and rising inflation. The government has indicated it will likely lower its growth targets for the year.
The second-quarter performance follows a similarly weak first quarter, which saw GDP grow by 2.8%. The government's target for the year was initially 5-6%. Economists had a median forecast of 2.8% for the second quarter, with some, like Deutsche Bank Research and BMI, predicting 2.5% and 2.7% respectively. The persistently high oil prices and supply chain disruptions from the Middle East conflict are expected to continue impacting the economy in the coming months.
