The Philippine economy is headed for a “slow and bumpy” recovery, with growth likely to fall below the government’s target this year after the multibillion-peso flood control corruption scandal and the war in the Middle East dragged economic expansion to a post-pandemic low, according to think tank Capital Economics.

In a report last Tuesday, Aug. 25, Capital Economics senior Asia economist Gareth Leather and deputy chief emerging markets (EMs) economist Jason Tuvey forecast Philippine gross domestic product (GDP) growth at just three percent in 2026, below the Marcos Jr. administration’s already-downgraded target of 3.5 to 4.5 percent as well as the country’s potential annual growth of about six percent.

“GDP growth in the Philippines slowed even further to just 2.3 percent year-on-year in the second quarter due to an ongoing corruption scandal and the initial blow from the Iran war,” Capital Economics noted.

The second-quarter GDP expansion was the country’s slowest quarterly growth since the Covid-19 pandemic, easing further from 2.8 percent in the first quarter.

Capital Economics sees little prospect of a rapid turnaround despite recent manufacturing purchasing managers’ index (PMI) readings pointing to some improvement in economic activity.

“Survey data provide tentative signs that activity may be rebounding, but we expect the recovery to be slow and bumpy,” Capital Economics said.

The report showed the think tank’s Philippine growth forecasts remaining below consensus estimates through 2027 and 2028.

The weaker economic outlook is also expected to constrain how far the Bangko Sentral ng Pilipinas (BSP) can go in its current monetary tightening cycle.

“The BSP is likely to deliver at least one more 25-basis-point (bp) hike, to five percent. But concerns about the weak economy will prompt it to move to the sidelines before long,” Capital Economics said.

The BSP’s Monetary Board (MB) will decide on interest rates on Thursday, Aug. 27, with another 25-bp increase widely expected. The policy rate currently stands at 4.75 percent.

Capital Economics also flagged the war in Iran as a major downside risk to Asian economies, including the Philippines, given their heavy reliance on imported energy.

“Most countries in Asia are big net energy importers, and the ongoing crisis in the Middle East poses a downside risk to the region,” the think tank said.

The Philippines is currently under a state of national energy emergency amid global oil price and supply shocks caused by the prolonged Middle East conflict.

Capital Economics expects oil prices to retreat in the coming months, but warned that a prolonged period of elevated prices would put “significant upward pressure on inflation across Asia.”

With the energy shock already prompting monetary tightening across the region, the think tank also expects further rate hikes in some Asian economies this year and warned that risks to its interest rate forecasts are tilted to the upside because of the recent jump in global energy prices.

For the region, Capital Economics said economic activity has so far remained resilient, with strong demand for artificial intelligence (AI)-related products providing an important buffer against elevated energy costs.