Elevated inflation, sluggish state spending, and rising import costs may have dragged Philippine gross domestic product (GDP) growth down to 2.5 percent in the second quarter, slowing further from an already five-year low of 2.8 percent in the previous quarter.

Frankfurt-based Deutsche Bank AG expects second-quarter GDP growth to decelerate amid overheating price pressures.

“Household consumption likely continued to decelerate in the quarter amid the spike in inflation, which averaged 6.8 percent year-on-year in the second quarter, up from 2.8 percent in the first quarter,” Deutsche Bank Research wrote in a July 31 commentary.

If realized, Deutsche Bank’s second-quarter forecast would fall short of the government's revised GDP growth target of 3.5 percent to 4.5 percent. Average growth for the first half, which could come in at 2.7 percent, would also miss the mark.

In addition, the Marcos administration spent its budget at a slower-than-usual pace during the first half of 2026. Deutsche Bank noted that the state disbursed 46.7 percent of its planned expenditures—below the five-year average of 47.7 percent for the comparable period.

“Net trade is likely to exert a heavier drag on headline growth as costlier imports of fuel and raw materials more than offset AI tailwinds for electronics exports,” the German lender added.

Meanwhile, think tank Moody’s Analytics projected the Philippine economy to have picked up to 3 percent in the second quarter—though still tracking below the government’s full-year target.

“Stronger government spending and modest export growth likely provided support in the June quarter, while elevated inflation and higher borrowing costs likely weighed on household consumption and private investment,” Moody’s said.

Reflecting the broader economic deceleration, household spending growth hit a five-year low of three percent in the first quarter.

While borrowing costs were already on an upward trajectory early in the year, persistent price pressures forced the Bangko Sentral ng Pilipinas (BSP) to tighten monetary policy further to curb demand and cool inflation. Since Middle East hostilities erupted in late February, the BSP has raised key rates twice, bringing the benchmark rate to 4.75 percent.

Much of the inflationary shock stemmed from prolonged military hostilities involving the United States and Iran surrounding the Strait of Hormuz, where transit disruptions choked off roughly 20 percent of the world's oil supply.

Deutsche Bank noted that moderating energy costs may have offered slight relief, estimating headline inflation at 6.4 percent in July—unchanged from the two-month low seen in June.

“We forecast headline inflation to remain unchanged at 6.4 percent year-on-year in July, as the moderation in energy prices could be offset by increases in food prices, particularly rice,” Deutsche Bank said.

In June, the BSP raised its average inflation forecasts for 2026 and 2027 to 6.4 percent and 4.5 percent, respectively, from previous estimates of 6.3 percent and 4.3 percent—with both remaining well above its two percent to four percent target tolerance band.