Stagflationary pressures are building in the Philippines as swift and pronounced spillovers from the Middle East conflict prompt the International Monetary Fund (IMF) to slash its growth forecast while anticipating above-target inflation.

According to the IMF’s April 2026 World Economic Outlook (WEO) published on Tuesday, April 14, the Washington-based multilateral lender slashed its growth projection for the Philippines to 4.1 percent, a drastic revision from the 5.6-percent forecast issued in January.

It bears noting that this 1.5-percentage-point (ppt) reduction is among the most severe downward revisions in the region, signaling a softening economy even as price pressures intensify.

This expected gross domestic product (GDP) slump, the IMF said, is driven by a combination of external shocks and domestic fragility.

“Growth in the Philippines is revised downward by 1.5 ppt for 2026, relative to January, with the war shock compounding the negative base effects from a weaker-than-expected 2025 outturn related to a sharp decline in public investment and confidence,” the IMF said in the report.

Further, an IMF spokesperson said that the ongoing military hostilities between the United States (US) and Iran added insult to the economic injury caused by large-scale flood control corruption in 2025.

In Southeast Asian economies like the Philippines, “disruptions in the Middle East are expected to reduce tourism and remittance inflows, thereby weakening domestic demand,” the WEO report read.

Recall that economic growth sharply slowed to 4.4 percent in 2025 amid muted confidence dampened by billion-peso flood-control corruption. Last year’s GDP print was likewise the weakest full-year growth since the Covid-19 pandemic years.

“Risks to growth are tilted to the downside while inflation risks are tilted to the upside, reflecting the risk of a prolonged war in the Middle East, further escalation of geopolitical tensions, and higher trade policy uncertainty,” the IMF said.

“Domestic risks stem from the impact of corruption allegations related to flood-control projects, extreme climate events, and weaker-than-expected reform momentum,” the IMF added.

Compounding the growth slowdown is a projected spike in consumer prices. Price pressures are expected to surge to 4.3 percent in 2026, a dramatic jump from 1.7 percent in 2025.

This would also breach the four-percent ceiling that the Bangko Sentral ng Pilipinas (BSP) has set, and hit its fastest pace in three years since 2023’s six-percent average.

Inflation rates within the tolerance band of two to four percent are deemed manageable and conducive to economic expansion. Inflation is projected to ease back to the target band at 3.2 percent in the following year.

With growth slowing and prices rising, the economy faces stagflationary conditions, further worsened by a current account deficit projected to widen to 4.4 percent of GDP in 2026 from 3.3 percent last year.

This projection is wider than the four percent projected by the BSP, which the central bank expects to stabilize through 2027.

On borrowing costs, the IMF said an accommodative stance remains “appropriate,” arguing that the country has been expanding far below its potential. The government is targeting to expand the economy by at least five percent this year.

However, the IMF said the BSP “should be ready to tighten monetary policy if risks of de-anchoring inflation expectations arise.” Last month, the BSP opted to keep the 4.25-percent key interest rate unchanged on the back of well-anchored inflation expectations.