Subpar Philippine economic performance likely lingered through the second half of 2025 and threatens to spill over into 2026, driven by the flood control infrastructure corruption scandal that has put both public and private investments largely on hold, according to the World Bank.

“Data from the fourth quarter of 2025 were broadly consistent with third-quarter trends, pointing to a decelerating economy despite robust merchandise exports and low inflation, as public and private investments continued to stall,” the World Bank said in its Philippines monthly economic developments report for January 2026.

The Philippine Statistics Authority (PSA) reported on Wednesday, Jan. 28, that the economy expanded even more slowly than expected in the third quarter of 2025, with a revised growth rate of 3.9 percent, slightly below the 4.5-year low of four percent reported last November.

The government is set to report fourth-quarter and full-year 2025 gross domestic product (GDP) performance on Thursday, Jan. 29.

Citing the PSA’s latest volume of production index (VoPI) data—a proxy for factory output—as well as labor market figures, the report noted that “manufacturing activity contracted and unemployment ticked up in November 2025, suggesting a sluggish fourth quarter.”

Manufacturing output declined as increased import competition and weaker demand weighed on production, with the VoPI falling by 1.5 percent due to reduced demand for domestically produced basic metals as well as chemical and petroleum products, the World Bank said.

The downturn, linked to excess industrial capacity in China and softer consumer sentiment partly caused by weather disruptions, also led to lower manufacturing employment and pushed the unemployment rate up to 4.4 percent from 3.2 percent in November 2024, it added.

While “the holiday season likely lifted activity in December,” the World Bank cautioned that “consumer and business sentiment remained muted.”

“Consumer surveys and business associations note that holiday spending in 2025 was weaker than normal, contributing to slower average growth for the year,” it said.

In the aftermath of the discovery of billions—if not trillions—of pesos in public funds wasted on “ghost” and substandard flood control projects, the World Bank noted that “public spending continued to decline owing to lower capital outlays.”

It cited, for instance, that disbursements on public goods and services fell by an estimated 0.6 percentage point (ppt) of GDP as of November 2025 from a year earlier, as capital spending declined amid a widening probe into governance issues in public infrastructure projects.

The impact also spilled over into investor sentiment, with the World Bank noting that “foreign direct investment (FDI) fell sharply, as investors adopted a ‘wait-and-see’ stance amid recent governance concerns.” The latest Bangko Sentral ng Pilipinas (BSP) data showed that net FDI inflows dropped by nearly two-fifths year-on-year in October 2025 alone, bringing end-October figures down by almost a fourth.

Looking ahead, the World Bank warned that “early data in 2026 paint an uncertain picture for the year’s outlook.”

“Leading indicators point to some concerns over the outlook. For example, market sentiment declined in the first quarter of 2026 and for the next 12 months, as firms and consumers anticipate the fading of seasonal demand and weaker economic conditions,” the World Bank said, citing the BSP’s latest business confidence and consumer outlook indices.

The World Bank nonetheless welcomed the passage of the ₱6.793-trillion 2026 national budget, which reallocates more funds toward human capital development.

The report noted that while the overall spending envelope remains broadly unchanged at an estimated 22.2 percent of GDP, its composition has shifted markedly, with capital outlays cut to 1.7 percent of GDP amid infrastructure corruption allegations.

Meanwhile, allocations for education and health were increased to address service delivery gaps and strengthen universal healthcare, alongside a sharp reduction in unprogrammed appropriations (UAs), signaling tighter fiscal controls, the report added.

For the World Bank, key Philippine economic risks to watch include the impact of a new one-percent United States (US) tax on outbound cash transfers on remittance inflows; how the BSP will balance inflation pressures from higher power costs and a weaker peso against slowing growth at its February policy meeting; and the growth implications of shifting fiscal spending from infrastructure to human capital.

If realized, these estimates would remain within the government’s downgraded growth target of five to six percent for this year but would fall short of the 5.5- to 6.5-percent goal for 2027, with the 2025 projection broadly aligning with Department of Economy, Planning, and Development (DEPDev) Secretary Arsenio M. Balisacan’s revised outlook of 4.8 to five percent after he conceded in December that last year’s 5.5- to 6.5-percent target was no longer attainable.