Philippine economic growth would likely further slow in the next two years to remain below the government’s more ambitious annual targets amid a global deceleration fueled by trade and geopolitical tensions, according to the Washington-based Institute of International Finance (IIF).

A June 25 report authored by IIF managing director and chief economist Marcello Estevão and senior economist Jonathan Fortun showed that the global financial industry association forecasts the Philippines’ gross domestic product (GDP) to grow by 5.5 percent this year and 5.6 percent next year—both lower than last year’s already weaker-than-expected 5.7 percent.

These growth projections for 2025 and 2026 are also beneath the government’s goal of six- to eight-percent expansion for both years.

Despite this, IIF deputy chief economist Ashok Bhundia and associate economist Phoebe Feng cited the Philippines, alongside China and Thailand, among the few emerging markets (EMs) in Asia that had so far “delivered modest upside surprises on the back of fiscal support and resilient exports.”

Amid the threat of higher United States (US) tariffs, the IIF noted that total goods exports accounted for only 15.9 percent of the Philippines’ GDP—one of the smallest in emerging Asia, compared to the likes of Vietnam (87.8 percent of GDP), Malaysia (78.2 percent), Thailand (57.1 percent), Taiwan (55.2 percent), South Korea (36.6 percent), China (19.1 percent), and Indonesia (19 percent).

Philippine exports to the US account for an even smaller 2.6 percent of GDP, compared to Vietnam’s 25.9 percent, Taiwan’s 14 percent, Thailand’s 10.4 percent, Malaysia’s 10.3 percent, South Korea’s 6.8 percent, and China’s 2.8 percent.

With a relatively small trade-in-goods surplus—merchandise exports exceeding imports—with the US, equivalent to just 0.8 percent of GDP, the Philippines is facing one of the lowest reciprocal tariffs among America’s Asian trading partners, at 17 percent. The 90-day pause on US tariffs will end in early July.

Across Asian EMs, “the region’s outlook is clouded by high exposure to US trade and tariffs,” such that the IIF projected regional GDP growth at a lower 4.8 percent this year than the 5.1 percent recorded last year, “driven by a slowdown in global trade as the US administration lifts tariffs to a baseline of at least 10 percent.”

“With much of Asia highly open to international trade, a minimum tariff level of 10 percent imposed by the US remains the key downside drag to growth, with Thailand, Malaysia, South Korea, Taiwan, and Vietnam particularly vulnerable,” the IIF said.

“The impact on individual economies will hinge on the outcome of bilateral negotiations, compounded by a potential tit-for-tat trade war among the three major economies: the US, the European Union (EU), and China,” the IIF added.

The Department of Trade and Industry (DTI) is eyeing Philippine tariff rates of below 10 percent following negotiations with US economic and trade officials in early May.

For the IIF, “some economies may be able to mitigate the impact of tariffs as beneficiaries of supply-chain diversification and export rerouting.”

“Overall, these dynamics will slow global trade, depress investment, and have negative spillover effects on employment and consumption across the region,” the IIF warned.

The IIF said monetary policy easing by regional central banks as well as fiscal policy would mitigate tariff-inflicted downside risks to economic growth.

The Bangko Sentral ng Pilipinas (BSP) last week cut the key interest rate by 25 basis points (bps) to 5.25 percent while hinting at more reductions before year-end, citing the need for a “more accommodative monetary policy stance.”

“Inflation across the region has largely come down to or below targets,” the IIF noted. In the Philippines, for instance, end-May headline inflation averaged 1.9 percent, below the government’s targeted two- to four-percent range of manageable annual price hikes deemed conducive to economic growth, as domestic rice prices fell year-on-year.

The IIF said that “US tariffs are also expected to have a disinflationary effect on the region by dampening export demand.”

“Therefore, despite the next Fed cut not fully priced until September 2025, the inflation outlook in Asia together with a weak US dollar backdrop provides room for monetary easing ahead of the Federal Reserve,” the IIF said.

Globally, the IIF said that “while our current forecast for 2025 does not suggest a global recession, it points to a meaningful deceleration compared to historical benchmarks and now incorporates the rising geopolitical premium following the June Israel-Iran escalation.”

The IIF expects global growth to slide to 2.6 percent this year, well below the average of 3.7 percent from 2011 to 2019—the period marking the end of the global financial crisis (GFC) until before the Covid-19 pandemic wreaked havoc on the world economy.