Philippine GDP likely grew 2.6% in Q2, says UA&P

THE PHILIPPINE ECONOMY is expected to have further slowed in the second quarter, as gross domestic product (GDP) growth likely eased to 2.6% due to elevated inflation and weaker domestic demand, the University of Asia and the Pacific (UA&P) said.

“The Philippine economy is posting early signs of recovery momentum, but the outlook remains constrained by elevated inflation and weaker domestic demand,” UA&P said in its latest The Market Call report.

“Against this backdrop, we estimate second-quarter (Q2) GDP growth at 2.6%, with consumption and investment likely weighed down by recent headwinds,” it added.

If realized, the 2.6% growth would be slower than the 5.44% expansion recorded in the second quarter of 2025 and the 2.8% growth in the first quarter this year.

It would also mark the fourth straight quarter of weaker annual economic growth.

“While inflation eased slightly in May, elevated price pressures and the peso weakness amid higher global oil prices are expected to continue weighing on private consumption and business investment, tempering the pace of overall economic growth in the near term,” UA&P said.

Headline inflation quickened to 6.8% in May, easing from the 7.2% in April but still above the Bangko Sentral ng Pilipinas’ (BSP) 2%-4% tolerance band.

The BSP on Tuesday said June inflation likely settled within the 6% to 7%. If realized, inflation would remain above the government’s target for a fourth straight month.

“Inflation is likely to stay above target for the rest of the year, keeping the BSP on a tightening path where we expect an additional 50 basis points (bps) of rate hikes,” UA&P said.

To rein in inflation, the central bank has already raised its policy rate twice this year, bringing it to 4.75% in June. A further 50 bps of tightening would bring the benchmark rate to 5.25% by yearend.

“Risks of an off-cycle hike diminished with the softer inflation reading, but the BSP remained hawkish at its latest policy conference,” it said.

“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,” it added.

Meanwhile, UA&P said manufacturing activity and industrial output have continued to improve, alongside a steady labor market.

“Softer export growth and moderating capital goods imports suggest external demand and investment remain cautious,” it added.

However, UA&P said continued disruptions from the Middle East conflict have exposed lingering labor market softness. While the unemployment rate eased to 4.7% in April from 5% in March, the decline was largely driven by a smaller labor force rather than stronger hiring.

“Looking ahead, steady household consumption, revamped infrastructure implementation, and softer crude prices should support job creation, particularly in services and construction,” it said.

“However, global economic uncertainty and softer domestic growth could temper the pace of hiring, suggesting that labor market conditions are likely to remain stable rather (than) accelerate significantly in the near term,” it added.

Also, remittance growth cooled in April due to headwinds from the Middle East conflict and frontloading in the first quarter, UA&P said.

Cash remittances from overseas Filipino workers rose by 2% year on year to an 11-month low of $2.718 billion in April. This was the weakest annual growth in nearly four years or since the 1.8% expansion recorded in May 2022.

“The recent Middle East peace progress could see stabilized overseas Filipino workers’ deployment, which may support remittance flows moving forward, though inflation in sender countries could temper any outsized gains,” it added.

On the foreign exchange front, UA&P said the peso is likely to remain in the P61-per-dollar range in the near term.

“Sticky domestic inflation, a still-wide trade deficit, and a more hawkish Federal Reserve are expected to sustain demand for the dollar and maintain interest rate differentials in favor of US assets,” it said.

“That said, further peso depreciation could be tempered if global oil prices continue to soften, easing pressure on the country’s import bill and inflation expectations,” it added.

On Wednesday, the peso closed at P61.621 against the greenback, weakening by 26.1 centavos from its P61.36 finish on Tuesday. — Justine Irish D. Tabile