PIDS warns risks could slow Philippine growth through 2026

By Francis Allan L. Angelo

The Philippine economy is expected to keep expanding through 2026, but emerging global and domestic risks could test the country’s ability to sustain momentum as it moves closer to upper-middle-income country status, according to a new study by the Philippine Institute for Development Studies.

In a discussion paper titled “Macroeconomic Prospects of the Philippines in 2025–2026: Restoring Confidence amid Glocal Transitions,” PIDS Senior Research Fellow John Paolo R. Rivera, former Research Specialist Mark Gerald C. Ruiz, and Research Specialist Ramona Maria L. Miral reviewed the country’s economic performance in 2024 and early 2025 and assessed prospects over the medium term.

The study projects the economy to grow from 5% in 2025 to 5.3% in 2026, supported by domestic demand, infrastructure spending, and continued expansion in the service sectors.

While these projections indicate resilience, the authors noted that growth has remained below government targets and that maintaining progress will require careful risk management.

The economy reached 5.7% in 2024, driven mainly by the services and industry sectors, but it still fell short of the government’s growth targets for the second year in a row.

“The Philippine economy continues to inch closer to UMIC status, even as it navigates persistent internal and external headwinds,” the authors noted.

The study points out that the country narrowly missed the UMIC threshold in 2024, emphasizing how close — but also how vulnerable — the transition remains.

For context, global income classifications typically rely on per-capita income thresholds, and the line between lower-middle-income and upper-middle-income status can be crossed or missed by relatively small changes in national income per person.

In the first half of 2025, growth moderated slightly to 5.4%, reflecting softer investment activity and continued uncertainty in global trade.

That combination of a still-expanding economy and a cooling pace is the environment in which policymakers are trying to protect gains in jobs, household purchasing power, and investment appetite.

INFLATION EASING

One bright spot in the report is inflation, which eased enough to fall within the Bangko Sentral ng Pilipinas’ target range.

Headline inflation averaged 3.2% in 2024, well within the BSP’s target range of 2% to 4%.

By October 2025, inflation had further eased to 1.7%.

This improvement allowed the BSP to begin easing monetary policy, thereby lowering borrowing costs.

Lower borrowing costs can support household consumption and business investment, particularly when growth is driven largely by domestic demand.

Still, the authors caution that price stability remains sensitive to factors such as food supply, exchange rate movements, and global commodity prices.

For ordinary Filipinos, lower inflation means less pressure on daily expenses, but the study suggests households remain cautious after several years of high prices.

That lingering caution can limit the speed at which consumption rebounds, especially for discretionary spending.

SERVICES LEAD, AGRICULTURE LAGS

The study highlights the services sector as the main engine of growth, supported by wholesale and retail trade, finance, construction-related services, tourism, and the business process outsourcing industry.

The BPO sector, in particular, continues to benefit from global demand for digital and AI-enabled services.

That demand has helped services exports cushion the economy against global trade volatility, even as imports remain heavy.

The strength of services also reflects how the Philippine economy has become increasingly urban and consumption-led over the past decade.

In contrast, agriculture, forestry, and fisheries contracted by 1.6% in 2024, largely due to climate-related disruptions and disease outbreaks.

While the sector rebounded in early 2025, the authors stress that agriculture remains highly vulnerable to weather shocks and structural weaknesses.

Those weaknesses include productivity gaps, fragmented supply chains, and chronic exposure to typhoons and drought.

Because food prices are a major driver of inflation, agriculture’s fragility can quickly reappear as a macroeconomic risk.

JOBS IMPROVE, BUT…

Labor market conditions have generally improved, with unemployment falling below 3.8% in 2024.

Low unemployment can support consumption, especially when paired with easing inflation and lower borrowing costs.

However, the study notes that labor force participation has declined, raising questions about long-term workforce sustainability.

This suggests that while jobs are being created, many Filipinos may be shifting to overseas employment or leaving the labor force altogether due to caregiving responsibilities or schooling.

A shrinking participation rate can constrain potential growth over time if fewer people are available to fill expanding roles, particularly in higher-skill service industries.

It can also deepen mismatches, where vacancies exist but skills or location barriers prevent workers from taking them.

TRADE, PESO VOLATILITY, AND GLOBAL RISKS

Externally, the Philippines continues to rely heavily on imports, resulting in a persistent trade deficit.

Services exports — especially Information Technology and Business Process Management — help cushion the impact, but new global risks are emerging.

The authors flag potential disruptions from US tariff escalation, supply-chain realignments under the Regional Comprehensive Economic Partnership, and geopolitical tensions.

For a country tied into electronics supply chains and reliant on stable external demand, trade-policy shocks can affect investment planning and export growth.

The recent weakening of the peso has also added uncertainty for businesses and investors.

The peso hovered near PHP 58 to PHP 59 per USD 1 in late 2025.

A weaker currency can raise import costs and complicate budgeting for firms that buy fuel, raw materials, or equipment from abroad.

Peso volatility can also affect debt servicing costs for borrowers with foreign-currency exposure.

FISCAL CONSTRAINTS

The set of risks described in the study arrives at a time when fiscal space is already constrained.

The national government debt remains at approximately 60.7% of gross domestic product.

Higher interest payments and recurring disaster-related costs tied to climate shocks can strain the budget.

That strain can force difficult tradeoffs between infrastructure spending, social protection, and deficit reduction.

Because the growth outlook assumes continued infrastructure investment, governance and execution become even more important for ensuring public spending translates into real economic output.

CONFIDENCE AND GOVERNANCE TAKE CENTER STAGE

Beyond numbers, the study delivers a strong message on governance, arguing that economic momentum cannot be sustained without trust in institutions.

“The immediate policy priority must be to penalize corrupt officials and their accomplices swiftly, visibly, and without exception,” the authors stressed.

They warn that delays in reform come at a real cost.

“Delays in governance reforms translate to lost competitiveness, weaker investor sentiment, and missed opportunities for long-term development.”

The authors’ emphasis reflects a broader principle in development economics: even strong macroeconomic indicators can be undermined when institutional credibility is questioned.

When investors see corruption risks as unpredictable, they may delay projects, shift capital elsewhere, or demand higher returns to compensate.

For households, repeated scandals and weak enforcement can also dampen confidence, reducing consumption and amplifying caution.

DIGITAL ECONOMY: ENGINE AND STRESS TEST

The sources attached to the study position the digital economy as a central pillar of future growth.

The BPO and IT-BPM sectors are expected to keep evolving toward higher-value services as global demand shifts toward digital and AI-enabled work.

That shift increases the premium on workforce readiness, particularly in analytics, cybersecurity, health technology, and other knowledge process outsourcing niches.

The study-linked materials also highlight how digital finance is changing the economy’s plumbing.

In 2024, digital payments reached 57.4% of the total volume of retail transactions, surpassing the halfway mark for the first time.

Government transactions were even more cash-lite, with 97.2% of government payment transactions conducted through electronic channels.

These shifts can improve efficiency, reduce leakages, and widen access, especially for communities that previously relied mostly on cash.

At the same time, the materials note that digital growth faces headwinds.

Digital payment fraud in the Philippines has risen slightly above the global average, underscoring the need for stronger authentication systems and more resilient consumer protections.

The study’s broader point is that digital momentum depends on governance quality, regulatory predictability, and public trust, not only on technology adoption.

2026 AND BEYOND

Looking ahead, the study projects moderate growth in 2025 and 2026, supported by easing inflation and domestic demand.

However, achieving UMIC status and sustaining inclusive growth will require more than favorable macroeconomic indicators.

“A stronger, more predictable governance environment is not merely desirable; it is indispensable for an economy aiming to transition into a high productivity, innovation-driven, and inclusive society,” the authors stressed.

In the authors’ framing, the economy’s challenge is not only to keep growing, but to protect confidence while navigating “glocal” shocks that can arrive quickly and compound.

Growth is possible, but confidence — earned through credible institutions and consistent reforms — will determine whether the Philippines can truly move forward.