This article first appeared in BusinessWorld on July 17, 2026.

The Philippine economy entered 2026 on weaker footing than many anticipated. Growth slowed for a third consecutive quarter to 2.8 percent in the first quarter, while inflation remained elevated at 6.4 percent in June, staying above the Bangko Sentral ng Pilipinas (BSP)’s target for a fourth straight month. These developments make a mid-year assessment timely.

During AMRO’s visit in May, discussions with policymakers, financial institutions, rating agencies, and think tanks in Manila pointed to an economy facing significant headwinds—but also benefiting from several important tailwinds. Together, they offer a more balanced picture of the country’s outlook.

Three headwinds weighing on the economy

1. Inflation has surged following the energy shock. As a major net energy importer, the Philippines is particularly vulnerable to swings in global oil prices. The Middle East conflict has pushed oil prices higher, and the Oil Deregulation Law allows much of the increase to pass through quickly to domestic fuel prices. The impact has been broad-based, with second-round effects spreading to food and transport. Core inflation rose to 4.4 percent in June, its highest in more than two years. AMRO expects headline inflation to average 6.0 percent in 2026, up sharply from 1.7 percent in 2025, and to stay above the BSP’s 2–4 percent target in 2027.

2. Public investment has weakened. Following the corruption allegations emerged in mid-2025, infrastructure projects were delayed or cancelled, contributing to a sharp 31.5 percent year-on-year contraction in public construction in the first quarter of 2026. A gradual rebound is expected in the second half of the year, but its pace will depend on how quickly the government resumes strategic public infrastructure projects, including roads, bridges, schools and health facilities.

3. Service exports are under pressure. The Philippines’ globally competitive Information Technology and Business Process Management (IT-BPM) industry remains concentrated in routine tasks that are most vulnerable to automation as AI adoption accelerates. Reflecting these pressures, exports of information and communication technology (ICT) and other business services grew by just 4.4 percent, the slowest pace in five years. Tourism has also yet to recover to its pre-pandemic level.

These challenges are significant, but they do not tell the whole story. The Philippines also benefits from several important sources of resilience that should help cushion the economy and support growth in the second half of 2026.

Three tailwinds for cautious optimism

1. The AI boom is lifting electronics exports. Electronics account for more than half of the country’s goods exports and are benefiting from the global AI investment upswing. Semiconductor exports are expected to remain strong, helping offset softer demand in other export sectors and providing an important buffer against external headwinds. While the Philippines remains concentrated in the lower value-added assembly, testing and packaging (ATP) segment of the semiconductor value chain, AI-driven demand should continue to support growth and the external sector, even if the gains are likely to be smaller than those of some regional peers.

2. Steady remittance inflows continue tosupport household consumption. With household consumption accounting for around three-quarters of GDP, steady remittance inflows should help cushion domestic demand against the drag from weaker public investment and elevated inflation. Remittance growth has held steady at around 3 percent since 2022, and the 2.8 percent increase recorded in the first quarter of 2026 suggests that the Middle East conflict has not materially disrupted overseas workers’ income flows.

3. The policy response has been timely and proactive. The government declared a state of energy emergency in March to accelerate the release of funds and introduced targeted support measures, including transfers and subsidies for transport workers, farmers, and fishers, as well as excise relief on kerosene and LPG. The BSP also acted decisively, raising its policy rate twice by a cumulative 50 basis points to reinforce its commitment to price stability. Although the current inflation surge is largely supply-driven, the pre-emptive tightening should help anchor inflation expectations and limit second-round effects, reducing the risk that temporary price pressures become more persistent.

Looking ahead

Taken together, these headwinds and tailwinds point to a more nuanced outlook for the Philippine economy in the second half of 2026.

High energy prices and weaker public investment have weighed on growth, while elevated inflation has complicated the policy landscape. The downside risks remain significant, but the challenge is not simply to provide more policy support, it is to calibrate that support carefully.

On the monetary side, the combination of slowing growth and surging inflation pulls policy in opposite directions. Tightening too aggressively could weaken growth further, while easing prematurely risks allowing inflation expectations to become unanchored. In this context, the BSP’s commitment to a gradual, data-dependent approach is appropriate to keep inflation expectations well anchored while remaining responsive to evolving economic conditions.

Fiscal policy faces a similar balancing act. Policymakers must continue supporting vulnerable households while maintaining their commitment to fiscal consolidation under the Medium-Term Fiscal Framework. There is room to strengthen targeted support while accelerating well-governed disbursement of infrastructure investment spending. With monetary policy alone unable to offset a supply-driven shock, a well-coordinated policy mix will be essential.

The Philippines faces considerable challenges in the months ahead, but it also has important strengths to draw on. AI-driven electronics exports, steady remittance inflows, and timely policy responses provide important sources of resilience that should help the economy navigate the current challenges while supporting a more durable recovery. Preserving macroeconomic stability while sustaining long-term investment and reform will be key to ensuring that today’s shocks do not become tomorrow’s constraints.