The Philippines' economic recovery likely lost momentum in the third quarter, held back by delays in public infrastructure projects and soft household spending, according to BMI, a unit of Fitch Solutions.

“Early indicators suggest the Philippine economy entered Q3 with less momentum than anticipated,” BMI said in a report dated Sept. 18.

The research firm currently projects gross domestic product growth of 3.3% for the Philippines this year, below the government's 3.5%-4.5% target. It warned that weaker-than-expected public capital expenditure in the third quarter could shave about 0.2 percentage point off its full-year forecast, pulling growth down to 3.1%.

“We are likely to make this adjustment if July-August capital outlay data confirm our assessment,” BMI said.

BMI had previously expected stronger public capital spending and favorable base effects (easier year-on-year comparisons) to drive a second-half recovery, but early indicators suggest investment remained weak.

“The flood control investigation has re-intensified, culminating in the high-profile arrest of former speaker Martin Romualdez — who is the cousin of President Ferdinand Marcos, Jr. — on alleged graft charges,” it said. “The increased scrutiny probably delayed project implementation further, weighing on both public and private construction.”

The slowdown in public spending is already visible in official data. Infrastructure and other capital outlays fell 40.8% year on year in the first half to P367.4 billion from P620.2 billion. The economy expanded 2.6% over the same period, as investment suffered from declining public construction while household spending was dampened by rising prices and job losses.

Household consumption under strain

BMI said elevated inflation and weaker labor market conditions continued to weigh on household consumption — the largest single component of Philippine GDP, which makes swings in consumer spending a key swing factor for headline growth. The unemployment rate climbed to a four-year high of 6% in July from 4.9% in June, pointing to deteriorating labor market conditions.

“While the June-July period typically brings an influx of new graduates into the workforce, the scale of the increase points to broader labor market weakness, reinforcing household caution,” it added.

Weather disruptions deepen the drag

Severe weather likely weighed further on third-quarter growth, as tropical storms and monsoon rains led to school and workplace suspensions and disrupted household incomes and economic activity, BMI said. The firm cited preliminary estimates of P14.3 billion in infrastructure damage and P4.4 billion in agricultural losses from heavy rains and floods in August and early.

“These figures do not account for the wider economic costs arising from transport disruptions, lost working days and spillovers from weaker agricultural output. As such, these weather-related disruptions are likely to further reduce the likelihood of a meaningful rebound in third quarter growth,” it added.

Bright spots in manufacturing and exports

Manufacturing and exports offered some relief. The Philippine manufacturing purchasing managers' index — a survey-based gauge in which readings above 50 signal expansion — rose to 54.9 in August from 51.8 in July, while technology exports continued to benefit from strong demand linked to the artificial intelligence investment boom. Still, BMI said these gains were unlikely to fully offset weakness in investment and private consumption.

Inflation risks and the policy outlook

At the same time, renewed food and energy price pressures and a weaker peso have raised the risk of further monetary policy tightening.

Under BMI's base-case scenario of a US-Iran deal by end-September, inflation is expected to reaccelerate toward year end as higher food prices more than offset lower energy costs. The firm maintained its 5.7% inflation forecast for 2026, below the Bangko Sentral ng Pilipinas' 6.1% projection, which BMI said assumes more severe El Niño-related price pressures. El Niño is a climate pattern typically associated with drier conditions in the Philippines, adding a supply-side risk to food prices.

Renewed tensions in the Middle East, however, have lifted upside risks to that forecast, as higher global oil prices translate into domestic pump-price increases, while flood-related damage to crops could add to food inflation even before the effects of El Niño intensify.

BMI also cited peso weakness as another source of price pressure, noting the currency had weakened 6.3% against the dollar so far this year and breached the P62 level. A more hawkish US Federal Reserve could put further pressure on the peso and fuel imported inflation, it said.

“Since the central bank's August rate hike — which was described as a preemptive move — renewed inflation pressures, peso weakness and a more hawkish Fed have all strengthened the case for additional tightening,” BMI said. “However, we maintain our forecast that the bank will stand pat for the rest of 2026 for now, as weak economic growth raises the cost of further tightening.”

BMI said it would reassess its outlook after the September inflation release, with a further 25- to 50-basis-point (bp) hike to 5.25%-5.5% by year end as its most likely alternative scenario.

In August, the Monetary Board — the Bangko Sentral ng Pilipinas' policy-setting body — raised its key policy rate by 25 bps to an over one-year high of 5%, bringing cumulative increases since April to 75 bps. — Justine Irish D. Tabile

Source: Bworldonline