Local economy is showing tentative signs of recovery following the sharp deceleration, as manufacturing activity returned to growth in December and government infrastructure spending resumed.

In a report, Capital Economics economists Gareth Leather, senior Asia economist, and Jason Tuvey, deputy chief emerging markets (EM) economist, said the marginal expansion in the manufacturing sector suggests the worst of the recent downturn may have passed.

The London-based think tank noted that the Purchasing Managers’ Index rebounded at the end of the year, aided by the government restarting key projects that had been stalled by a sweeping corruption investigation.

However, they also added that while the outlook is improving, the recovery remains fragile. The firm is forecasting gross domestic product (GDP) growth of 4.5 percent for 2026—a figure that sits well below the market consensus—before a projected acceleration in 2027. Inflation is expected to settle around three percent this year.

Weak economic activity and cooling price pressures prompted the Bangko Sentral ng Pilipinas (BSP) to reduce interest rates in December.

Capital Economics expects further easing in 2026, aligning the Philippines with regional peers like South Korea, Thailand, and Indonesia, though most central banks in the region are nearing the end of their loosening cycles.

The manufacturing sector’s performance provides a much-needed reprieve. Data from S&P Global showed the manufacturing PMI rose to 50.2 in December from 47.4 in November. While the reading is only slightly above the 50-point threshold that separates expansion from contraction, it represents the first improvement in operating conditions since August.

However, a massive corruption scandal involving billion-peso flood-control projects continues to cast a shadow over the archipelago’s fiscal health. Capital Economics noted that the scandal led to significant delays in infrastructure projects, dragging fourth-quarter GDP growth down to just three percent

The Philippine Statistics Authority confirmed last week that the economy expanded by 4.4 percent for the full year 2025, the weakest performance since the height of the Covid-19 pandemic.

The three percent growth recorded in the final three months of 2025 matched levels last seen during the global slowdowns of 2009 and 2011.

Political and economic uncertainty has also weighed on the currency as the peso hit a record low earlier this month, falling to ₱59.46 per dollar on Jan. 15, according to data from the Bankers Association of the Philippines.

The currency has since recovered some losses but remains sensitive to the ongoing investigation into public works spending and shifting global investor sentiment.