The Marcos administration’s pivot toward stricter budget oversight and institutional reform is creating a persistent fiscal drag that threatens to pull economic growth below four percent by the end of 2025, according to HSBC.

During a roundtable with the media on Tuesday, Jan. 13, HSBC Southeast Asia economist Aris Dacanay cited that public infrastructure spending, a traditional engine of the country’s economy, fell 40 percent year-on-year in the third quarter of 2025.

Dacanay explained that this “spending choke” is not a temporary glitch but a structural shift that could weigh on output for the next two to four years, potentially outlasting the Marcos administration.

The slowdown in disbursements stems from heightened due diligence and more rigorous scrutiny of state-funded projects. While these reforms aim to improve the quality of public investment, the immediate result is a bottleneck that makes the government's growth targets increasingly elusive.

Dacanay expects the local economy, as measured by the gross domestic product (GDP), to expand by 4.7 percent in 2025, a more pessimistic outlook than the 4.8 percent minimum floor suggested by National Socioeconomic Planner Secretary Arsenio Balisacan.

He added that the medium-term outlook remains similarly subdued as HSBC projects GDP growth of 5.2 percent in 2026 and 5.6 percent in 2027, figures that trail the government’s revised target range of 5.5 percent to 6.5 percent.

According to the HSBC economist, the persistent shortfall is driven by the difficulty of balancing fiscal discipline with the need for aggressive expansion.

On the fiscal front, the national government continues to struggle with its consolidation plan after missing its deficit ceilings for four consecutive years, despite relatively small margins. The deficit stood at 5.7 percent of GDP in 2024, with targets set at 5.5 percent for 2025 and 5.3 percent for 2026.

Dacanay noted that the government has struggled to meet these goals even when the discrepancy was as narrow as ₱10 billion, suggesting that the institutional hurdles to efficient spending are deeply entrenched.

The current environment echoes the early years of the Aquino administration, where a push for transparency led to a significant slowdown in infrastructure rollouts.

Dacanay now expects this transition to continue through 2028 as the bureaucracy adapts to new procurement and vetting standards.

While the public sector remains a drag, Dacanay noted that the private sector offers a rare bright spot through cooling inflation and rising incomes. For the first time since the pandemic, wage growth has outpaced price increases.

Average daily wages rose approximately eight percent in 2025, significantly higher than the 1.7 percent average inflation rate. This boost in real purchasing power has yet to translate into a consumption boom, however. Private consumption, which represents 79.1 percent of the economy, is expected to moderate through 2027 as households prioritize savings.

Filipino consumers are exhibiting a defensive posture, with the household saving rate now exceeding pre-pandemic levels.

Even as inflation is forecast to stay below the three percent midpoint of the central bank's target band through 2026, the uncertainty regarding the broader economic trajectory is keeping wallets closed, further complicating the country's recovery path.