The World Bank warned that the Philippines’ broad-based economic slowdown in the first quarter of 2026 could spill over into weaker household incomes and higher food prices as the country grapples with an escalating energy price shock triggered by tensions in the Middle East.

In its latest Philippines monthly economic developments report published last Monday, May 18, the Washington-based multilateral lender flagged the risks of prolonged weakness in key sectors like agriculture and construction, which employ mostly poorer Filipinos.

The World Bank noted that the 2.8-percent Philippine gross domestic product (GDP) expansion during the first quarter reflected a “broad-based” slowdown, with services growth moderating while agriculture and industry both shrank year-on-year.

“Construction activity fell amid a steep decline in public infrastructure spending. Agriculture also contracted, reflecting weak crop output, including rice. Construction and agriculture employ many lower-skilled and informal workers, with strong links to household incomes at the lower end of the distribution,” the report noted.

As such, “a sustained downturn in these sectors would weaken labor income growth and raise food prices amid a mounting energy price shock” and softer domestic demand, the World Bank warned.

Moving forward, the World Bank further warned that “high-frequency indicators point to subdued economic activity going into the second quarter,” citing the decline in the country’s purchasing managers’ index (PMI) to 48.3 last April, signaling contraction in manufacturing activity and weaker production momentum across the Association of Southeast Asian Nations (ASEAN).

Business and consumer sentiment indicators monitored by the Bangko Sentral ng Pilipinas (BSP) also trended downward in the first quarter, the report further noted.

Inflation accelerated to an over three-year high of 7.2 percent last month despite slowing economic activity, while “food inflation also increased, reflecting weaker domestic supply and higher input costs,” the World Bank said, adding that this would likely weigh on household spending as food accounts for a large share of consumer expenditures, particularly among poor Filipinos.

The lender also warned that rising prices had begun spilling over into the broader services sector, noting that higher costs in restaurants, accommodation, and rents pushed core inflation to 3.9 percent in April.

Against this backdrop, the World Bank noted that the BSP has shifted to tighter monetary policy to contain inflation expectations and second-round effects from the energy shock, citing the central bank’s 25-basis-point (bp) interest rate hike last month amid a deteriorating inflation outlook.

“Rising inflation expectations heighten the risk of entrenching inflationary pressures,” the World Bank warned. “With inflation seen averaging 6.3 percent in 2026, real rates are expected to turn negative if the BSP does not raise interest rates further. Markets now price roughly over 200 bps of BSP tightening over one year, with the one-year implied rate moving to 6.4 percent, compared with about 4.25 percent in late February.”

“At the same time, given the dominance of supply-side inflation pressures, additional monetary tightening would need to be applied carefully given already subdued activity,” the report added.

The World Bank said it was closely monitoring “the persistence of second-round inflationary effects and the BSP’s tightening cycle,” particularly as inflation is projected to remain above the two- to four-percent target range up to next year.

In particular, the World Bank is watching how rising input and transport costs would affect inflation expectations, and how much weight the BSP would give to slowing economic activity in its upcoming policy decisions. The next policy meeting of the BSP’s Monetary Board (MB) will be on June 18.

Financial market sentiment has also remained weak since the outbreak of the Middle East conflict, according to the World Bank. The lender cited that government bond yields have been rising due to the higher-than-expected April inflation rate, while investors continued shifting toward safe-haven United States (US) dollar-denominated assets amid elevated energy prices.

The Philippine peso has likewise remained under pressure, closing at a fresh historic low of ₱61.75 against the US dollar at the start of this week amid concerns over higher oil prices and inflation as well as domestic political noise. The World Bank noted that regional currencies of other net oil importers like the Philippines had similarly weakened since the start of the war.

The report added that foreign investors were net sellers of local stocks, with the Philippine Stock Exchange index (PSEi) slipping by 0.4 percent month-on-month.

On the fiscal front, the World Bank said the government’s crisis response was designed to preserve energy availability while cushioning the impact of rising fuel prices on vulnerable sectors, citing measures such as additional fuel stock procurement, diversification of import sources, public-sector energy conservation, cash transfers, fuel subsidies, transport fare discounts, and service contracting programs.

The lender noted that excise taxes were suspended only for kerosene and liquefied petroleum gas (LPG), while both products remained subject to 12-percent value-added tax (VAT), hence limiting the projected fiscal impact.

According to the World Bank, the Philippines’ overall crisis-response package was estimated at 0.2 percent of GDP and would be funded through budget reallocations, spending cuts, and deferral of non-critical capital projects.

The World Bank said it was also monitoring “the evolution of the scale and mix of government crisis response measures,” noting that Philippine authorities have so far kept the response package within the existing fiscal envelope even as the energy crisis continues to evolve.