Weak consumption, public spending likely weighed on Q2 growth

By Katherine K. Chan, Reporter

TEPID CONSUMER and government spending likely slowed Philippine economic growth for a fourth consecutive quarter in the second quarter, analysts said.

Germany-based Deutsche Bank Research sees the country’s gross domestic product (GDP) growth at 2.5% in the April-to-June period, while Fitch Solutions unit BMI gave a 2.7% forecast. 

Their forecasts are much slower than the 5.4% expansion in the second quarter of 2025 and the 2.8% growth in the first quarter this year.

For Deutsche Bank Research economists, growth may have weakened for a fourth straight quarter as inflation woes strained consumer spending and state spending remained sluggish.

They noted that the country’s public spending as of June was weaker than its five-year average.

In the second quarter, government expenditure reached P1.684 trillion, 6.5% higher than the P1.582 trillion spent in the same period last year and nearly 13% from the P1.491 trillion in the first quarter.

This brought the government’s first-half spending up by 4.94% year on year to P3.18 trillion from P3.03 trillion.

“Fiscal disbursements remained slow, with the public expenditure run-rate of 46.7% as at June YTD lagging the 5-year average of 47.7%,” Deutsche Bank Research economists noted in a July 31 report.

“Net trade is likely to exert a heavier drag to headline growth as costlier imports of fuel and raw materials would more than offset the AI (artificial intelligence) tailwinds to electronics exports,” they added.

According to BMI Country Risk Analyst Brandon Ong, they would likely cut their full-year growth forecast for the Philippines if the second-quarter reading comes in weaker than expected.   

“Our nowcast points to a further slowdown in Q2 to 2.7%, from 2.8% in Q1. A weaker-than-expected Q2 reading would prompt us to revise down our full-year growth forecast,” he told BusinessWorld in an e-mail.

BMI projects the economy to grow by 3.9% this year, although Mr. Ong noted that the risks to their outlook are “skewed to the downside.”

This is slower than 4.4% expansion seen in 2025, but within the Development Budget Coordination Committee’s 3.5%-4.5% target for this year.

SLIGHT RECOVERY
Meanwhile, Japan-based Nomura Global Markets Research is anticipating a slight recovery despite weaker spending due to the lingering effects of the flood control mess and the ongoing Middle East war.

“We expect Q2 GDP growth to rise only slightly to 3.2% y-o-y after slumping to 2.8% in Q1, owing to another slowdown in government spending growth after it showed signs of a recovery in early 2026,” Yiru Chen, research analyst at Nomura Global Markets Research, said in a report dated July 31.

“Household consumption and private investment spending growth also remained lackluster, reflecting weak sentiment due to the corruption scandal that led to a sharp fiscal tightening, weighed down further by the impact on domestic energy prices from the war in Iran,” she added.

Based on the median estimate in a BusinessWorld poll of 21 economists and analysts conducted last week, Philippine GDP likely grew by 2.8% in the second quarter.

The Philippine Statistics Authority (PSA) will release the second-quarter GDP data on Friday (Aug. 7).

INFLATION AND POLICY
At the same time, analysts expect inflation to remain above 6% in July amid a fresh spike in energy prices due to the Middle East conflict.

Deutsche Bank Research economists said headline inflation may have steadied at 6.4% last month, matching the median forecast of 21 economists and analysts polled by BusinessWorld last week.

However, Nomura’s Ms. Chen sees pressures from higher pump and electricity costs driving the headline print to 6.6% in July from 6.4% in June.

“We expect CPI inflation to rise again to 6.6% y-o-y in July from 6.4% in June, led by a significant pickup in retail fuel prices due to higher crude oil prices and upward adjustments to electricity generation charges,” she said.

If both projections hold true, July will mark the fifth month in a row that headline inflation exceeded the Bangko Sentral ng Pilipinas’ (BSP) 3% target.

The BSP expects the headline figure to be between 5.6% and 6.6% in July.

Meanwhile, core inflation, which discounts volatile food and fuel prices, also likely picked up for a seventh consecutive month to 4.7% from 4.4% in the prior month as elevated oil prices continued to ripple to other commodities, Ms. Chen added.

Last month, retail pump prices jumped by as much as P11.70 per liter for gasoline, P26.19 per liter for diesel, and P23.89 per liter for kerosene.

Manila Electric Co. also raised its electricity rate for a second straight month by 34.28 centavos per kilowatt-hour (kWh) to P14.8261 per kWh in July from P14.4833 per kWh in June.

For Maybank Investment Bank, persistent inflation risks could prompt the hawkish BSP to hike its key policy rate by another 50 basis points (bps) before yearend.

Maybank Chief Economist Suhaimi Ilias and Economist Azril Rosli noted that the central bank will likely prioritize containing inflationary pressures despite a weak growth backdrop.

In a July 31 report, the Maybank economists said they now expect the BSP to bring the benchmark rate to 5.25% this year, before delivering one more 25-bp hike to 5.5% in 2027.

It earlier priced in a terminal rate of 5.25% by 2027, with one 25-bp hike each before end-2026 and next year.   

“While the pace of tightening will remain conditional on incoming inflation and growth data, we believe the BSP will continue to prioritize anchoring inflation expectations and restoring price stability over the near term,” Mr. Ilias and Mr. Rosli said.

The Monetary Board has so far increased the key interest rate by 50 bps to a near one-year high of 4.75%.

BSP Governor Eli M. Remolona, Jr. sees a small chance for a 50-bp hike as the reignited conflict in the Middle East sparked inflation concerns amid rising oil prices and weak peso.

The Monetary Board will hold three more policy reviews this year on Aug. 27, Oct. 22, and Dec. 17.