Growth outlook slashed

Economy now seen expanding by just 5.2% next year

Philippine economic growth will continue to lose momentum next year as both household spending and investments cool, a Fitch Group unit said.

“Headwinds to growth are mounting,” BMI Country Risk & Industry Research said as it cut the 2026 growth forecast for the country to 5.2 percent from 6.2 percent.

That for 2025 was kept at 5.4 percent — lower than the 2024 result of 5.7 percent — and growth is also expected to slow in the last six months of the year.

Both forecasts fall below the government’s 5.5- to 6.5-percent target for this year and 6.0-7.5 percent for 2026. If realized, growth will have fallen below target for four straight years.

“Growth in H1 2025 was driven by front-loading activity and robust domestic consumption. However, we expect growth to slow in H2 2025,” BMI said in an Oct. 22 commentary.

“Investment is likely to stay subdued in H2 given the uncertain global environment and weak infrastructure spending.”

An ongoing corruption scandal was said to have worsened investor sentiment, with BMI noting that the Philippine Stock Exchange index had fallen to a near six-month low last Sept. 30.

Manufacturing activity has also shown signs of strain, with the purchasing managers’ index contracting for the first time in six months in September.

Exports, meanwhile, sharply slowed in August from a month earlier.

‘Outsized impact’

As for 2026, BMI said that remittance growth was likely to slow due to tighter United States immigration policy and a 1-percent tax.

“A slowdown in remittances will weigh on domestic consumption, which will have an outsized impact on growth given the domestically driven economy,” it said.

The trade balance also expected to worsen given a US-Philippines deal that imposed a 19-percent duty on Philippine exports and none on American goods.

Erratic US trade policies and global uncertainty, BMI added, are seen constraining foreign direct investment flows into the country.

The Fitch unit cautioned that the risks to its forecast were tilted to the downside.

“Should the ongoing probe uncover corruption across other infrastructure projects beyond flood control, it could lead to even tighter scrutiny on government spending and reduce spending substantially below fiscally programmed levels,” it said.

The economy has underperformed so far for the year, averaging just below the 5.5- to 6.5-percent target as of end-June following 5.4-percent and 5.5-percent results in the first two quarters.

Preliminary third-quarter growth data will be released on Nov. 7, and economic managers have warned of a slowdown due to government spending having slowed due to the corruption mess.

BMI expects growth to rebound to 6.2 percent in 2027 and 6.3 percent in 2028.

Deficit to narrow

The Fitch unit, in a separate Oct. 22 commentary, also said that the country was likely to post a narrower fiscal deficit with spending having fallen below target.

BMI said the shortfall was likely to hit 5.5 percent of gross domestic product this year, down from 5.7 percent in 2024, and ease further to 5.4 percent next year.

While revenue collections have exceeded average monthly targets since the start of the year up to August, spending over the same period was behind programmed levels due to an election ban and weak infrastructure disbursements.

The spending shortfall will likely narrow but still undershoot the 2025 budget, BMI said, noting that Budget Secretary Amenah Pangandaman has warned of a slowdown due to the corruption mess.

Government infrastructure spending slowed by 5.6 percent to P798.4 billion as of end-August from P845.3 billion recorded last year, Budget department data showed.

Budget officials said the infrastructure project implementation will likely accelerate in the fourth quarter with the typhoon season over, and ”payment of progress billings may also start to normalize in the latter part of the year as internal controls have been put in place” by the Public Works department.

Fiscal consolidation will remain slow next year, BMI said, with tax collections unlikely to keep up with next year’s proposed P6.79-trillion government budget.

Tariff collections are also expected to fall due to the trade deal with the US.

‘Fiscally unfeasible’

Next year’s fiscal deficit forecast, BMI said, is supported by a “one-off privatization” — equivalent to 0.3 percent of gross domestic product — planned by the government.

“We think that this is fiscally unfeasible over the long run,” it said.

BMI noted that the Philippines’ public finances remain fragile with the debt-to-GDP (gross domestic product) ratio hovering around 60 percent, significantly above the pre-pandemic level of 40 percent.

“Elevated borrowing costs and a narrow revenue base further limit Manila’s ability to deliver large-scale fiscal support without compromising debt sustainability,” it added.

Debt-to-GDP ratio as of end-June, meanwhile, had climbed to 63.1 percent from 62 percent in the previous quarter and 60.9 percent a year earlier. It also exceeded the 60-percent threshold that multilateral lenders consider manageable for developing economies.

Source: Manila Times

Firms expect 5.2% pay hike in 2026 as 1 in 5 workers plan to quit

Companies in the Philippines are projecting only modest pay increases next year despite facing the steepest employee turnover rates in Southeast Asia.

The 2025 Salary Increase and Turnover Study by British-American consulting firm Aon projects an average 5.3% salary increase across Southeast Asia in 2026, signaling a stable but cautious compensation outlook as firms confirm a region-wide retention crisis and widening skills gaps.

“The 5.3% regional average reflects stable growth but underscores that competitive pay alone is no longer enough to retain skilled employees,” Aon said in its analysis.

The study analyzed data from more than 700 companies across six Southeast Asian markets, including Indonesia, Malaysia, Singapore, Thailand, Vietnam, and the Philippines.

The study shows that while most countries in Southeast Asia are keeping pay hikes moderate, Vietnam leads the region with a projected 7.1% salary increase next year, followed by Indonesia at 5.9%.

By contrast, Singapore and Thailand are among those keeping a tighter rein on compensation growth, with average increases of 4.3% and 4.7%, respectively.

Philippine companies' dilemma

In the Philippines, salaries are expected to rise moderately by 5.2% in 2026, which is slightly lower than this year’s 5.3% increase. The rate just sits below the regional average.

The country, however, is seen to have highest attrition rates in the region entering 2026, as one in five employees is expected to voluntarily leave their companies.                      

Source: Aon plc — 2025 Salary Increase and Turnover Study.

 This projected 20% attrition rate in the Philippines surpasses Singapore’s 19.3% and Malaysia’s 18.2%, underscoring a growing challenge among Philippine employers to hold on to skilled staff amid rising job mobility across industries. 

Sectors most affected include information technology, sales, engineering, and cybersecurity, where global demand for digital talent continues to pull Filipino workers toward better-paying opportunities abroad and in multinational firms.  

Source: Inquirer

Global growth and changing share in GDP

The Philippine Statistics Authority (PSA) released three important pieces of data: GDP performance in the second quarter (Q2) of 2025, which was 5.5%; the inflation rate in July, which was 0.9%; and the unemployment rate in June, which was 3.7%.

The GDP growth of 5.5% was the third fastest among the top 50 largest economies in GDP size that have reported their Q2 data so far. This is next to Vietnam and Taiwan that both grew by 8%. India has yet to release its Q2 data and it will likely be higher than the Philippines’.

The inflation rate of 0.9% was a six-year low for the country, and similar to Singapore’s 0.8%. It was lower than Malaysia’s 1.1%, Taiwan’s 1.5%, South Korea and India’s 2.1%, Indonesia’s 2.4%, Vietnam’s 3.2%, and Japan’s 3.3%.

Our unemployment rate of 3.7% was similar to Hong Kong’s 3.5% and lower than Indonesia’s 4.8% (March, no June data is available yet), or China’s 5% and India’s 5.6%.

The government’s economic team deserves praise as they are able to sustain the growth momentum while keeping unemployment and inflation rates at low levels.

[quote from the press statements of three Cabinet Secretaries.]

Finance Secretary Ralph G. Recto stated that: “The back-to-back good news — low inflation rate, vibrant labor market, and strong GDP growth — are very encouraging…. tuloy-tuloy po kami sa aming trabaho hangga’t ang ginhawa ay hindi lang nakikita sa datos, kundi nasa hapag, nasa bulsa, at nasa kinabukasan ng bawat pamilyang Pilipino. (We will continue with our work until the ease and relief is not only seen in the data, but also on the table, in the pocket, and in the future of every Filipino family).”

Budget Secretary Amenah F. Pangandaman optimistically projected that: “We anticipate growth to accelerate in the second half of the year and settle within the 5.5% to 6.5% target range by the end of the year, driven by strong domestic demand and sustained public investment.”

Economics Secretary Arsenio M. Balisacan summarized: “Our continued economic expansion reflects not only the success of our policies, but also the resilience, creativity, and determination of the Filipino people.”

I have compared the average Q1-Q2 growth of 2025 over the last two years, for major economies that have Q2 data already. The Philippines has the third fastest growth so far, while South Korea, Germany, and Austria are the laggards (see Table 1).

I was personally expecting growth of 6% in Q2, and other economists projected growth of 5.7-6%. What prevented the country from growing faster than 5.5%? To figure this out, I checked the PSA time series quarterly data from 2000 to 2025. I chose a five-year interval for both GDP demand side and GDP supply side.

On the demand side, household consumption was 77% of total GDP in 2005, and this declined to 71% in 2025. But while household consumption is still the largest component of GDP, its growth is decelerating. Government consumption, on the other hand, is rising, from 11% in 2005 to 17% in 2025, and growth is high at 14% in 2025. Investments or gross capital formation also increased its share, from 17% in 2005 to 24% in 2025, but growth is decelerating.

On the supply side or industrial origin, there has been a decline in Agriculture, fishery and forestry (AFF), from 14% in 2005 to 8% in 2025. Industry also declined, from 31% to 29%, while the services sector keeps expanding, from 55% to 63% over the same period.

Growth in both AFF and Industry is low while growth in services sector is high (see Table 2).

It is redundant to state this over and over again, but we have to keep growing fast, and we must attain an annual growth of 6% or higher for a decade at least. Both the industry and AFF sectors must grow faster than their recent performance, while the services sector only need to retain its high growth level.

More growth means more job creation and lower unemployment, more supply of goods and services, which all lead to lower inflation.

Source: Business World