The Bangko Sentral ng Pilipinas (BSP) expects the lingering investment slump triggered by recent fiscal controversies to weigh on the economy through 2026, keeping the nation’s output below its full potential for longer than previously anticipated.

The BSP said in its December 2025 monetary policy report that investment activity is projected to moderate further this year.

According to the central bank, the decline is expected to leave the output gap negative throughout 2026, indicating the economy is operating with significant labor and capacity slack.

This, as the country’s output gap, has become more negative compared to the central bank’s earlier assessments. The economy’s underperformance was blamed on subdued investment activity stemming from governance concerns.

A negative output gap indicates that the economy is producing below its potential, reflecting weak demand, unused capacity, and underutilized labor, which can weigh on growth, jobs, and price pressures.

Reflecting the dampened investment activity was weaker-than-expected third-quarter 2025 output growth of four percent—the slowest gross domestic product (GDP) expansion in four and a half years. Hence, the BSP’s below-target growth forecast of 4.6 percent for the full year of 2025.

Even with the persistent drags on the economy, the BSP still forecasts the output gap to improve, gradually approaching a neutral level “by end-2027.”

Further, the BSP said that “potential output growth is expected to moderate in the near term, as weak economic sentiment continues to constrain private investment.”

“This is compounded by subdued public infrastructure spending following the proposed removal of flood control projects from the 2026 budget of the Department of Public Works and Highways (DPWH),” it explained.

What would offset this moderation is the increasing inflation-adjusted earnings and household incomes of Filipinos.

It noted that the gradual rebound in investment activity and the government’s higher spending on infrastructure projects will support overall demand beginning next year.

“Growth is projected to be slightly higher in 2027, supported by the lagged impact of the BSP’s policy rate cuts since August 2024,” the BSP said. The BSP expects the economy to accelerate within the downscaled growth target of 5.5 percent to 6.5 percent in 2027.

To date, the policy-setting Monetary Board (MB) has reduced the key interest rate by a cumulative 200 basis points (bps), bringing the benchmark rate to 4.5 percent from a peak of 6.5 percent in 2024.

BSP Governor Eli M. Remolona Jr. said another quarter-point cut remains on the table at the February policy meeting, but cautioned that it is not likely. He, however, said a deeper round of policy rate cuts might be justified if GDP growth fails to hold the five percent level.

“Persistent uncertainty surrounding global economic policies, particularly in trade and investment, continues to pose downside risk to domestic growth,” the BSP added.