Think tank Capital Economics expects the Philippine economy to grow below the government’s downgraded targets over the next three years, warning that the country’s recovery would likely remain sluggish as weak confidence, tight fiscal policy, and the lingering impact of recent shocks weigh on activity.

In its latest Asia Economic Outlook report last Friday, June 26, Capital Economics forecast Philippine gross domestic product (GDP) growth at three percent this year, which, if realized, would be the country’s slowest post-pandemic economic expansion. It is also below the Marcos Jr. administration’s further downscaled GDP growth target of 3.5 to 4.5 percent for 2026.

“The economic recovery in the Philippines is likely to be sluggish and we expect below-consensus growth in 2026 to 2028,” Capital Economics said.

The think tank noted that the economy slowed further at the start of this year, with GDP expanding by just 2.8 percent year-on-year in the first quarter amid the lingering effects of the multibillion-peso flood-control infrastructure corruption scandal as well as the initial blow from the energy price and supply shock caused by the war in the Middle East.

It further noted that the first-quarter outturn was the weakest outside the Covid-19 pandemic-induced recession in 2020 and the global financial crisis (GFC) since the early 2000s.

Capital Economics nonetheless said the reopening of the Strait of Hormuz reduces the risk of outright energy shortages, while the decline in global energy prices should prevent inflation from rising further in the near term.

The think tank added that large amounts of spare capacity in the economy should keep core inflation pressures contained, while the Philippine peso has recovered some of its recent losses. Core inflation measures price changes excluding volatile food and energy items.

Still, Capital Economics said it does not expect a rapid recovery, even as lower inflation next year is expected to ease pressure on households’ real incomes.

The think tank further warned that weak confidence would hold back consumer spending and investment, while the fiscal stance is expected to remain tight to curb the rising debt-to-GDP ratio even if the government restarts stalled big-ticket infrastructure projects.

Capital Economics expects headline inflation to average 5.8 percent this year, above the government’s two- to four-percent target range of annual price hikes deemed manageable and conducive to economic growth, but lower than the updated six- to seven-percent projection for 2026 by the Cabinet-level, interagency Development Budget Coordination Committee (DBCC).

For 2027, the think tank sees inflation easing to 3.3 percent, which would fall within the government’s target band and below the updated DBCC projection of four to five percent.

Inflation is expected to ease further to 2.5 percent in 2028, also within the government’s target and the DBCC’s two- to four-percent projection for the year.

Capital Economics said it expects the Bangko Sentral ng Pilipinas (BSP) to further hike key interest rates by at least 25 basis points (bps), bringing the policy rate to five percent from the current 4.75 percent, as the inflation-targeting central bank focuses on the threat from faster consumer price increases.

However, the think tank said concerns over the weak economy would likely prompt the BSP to move to the sidelines before long, with rate cuts expected from early 2027.