Local economic growth suffered from a severe contraction in investments and a construction slump, causing Southeast Asia’s growth to slow to five percent in the second quarter.

In an Aug. 19 commentary, Singapore-based Oversea-Chinese Banking Corp. Ltd. (OCBC) Group Research reported that the Philippines’ slower second-quarter performance—alongside muted activity in Thailand and Indonesia—dragged down regional growth from April to June.

Weighted average gross domestic product (GDP) growth for the ASEAN-5 region slowed to five percent in the second quarter from 5.2 percent in the first. OCBC attributed this to easing domestic final demand growth, which slowed to an average of 4.7 percent from 5.5 percent in the previous quarter.

According to the Singaporean lender, the drag “mainly came from the Philippines.” The country’s economic growth slumped to a post-pandemic low of 2.3 percent during the quarter.

A major driver of weak domestic demand was the double-digit contraction in gross fixed capital formation (GFCF). OCBC senior ASEAN economist Lavanya Venkateswaran and ASEAN economist Jonathan Ng called this “a foreboding sign of worsening private sector demand conditions, which, if sustained, could lead to a precipitous decline in potential growth.”

Additionally, the construction sector shrank by 13.9 percent during the period—its fourth consecutive quarter of decline. This sluggish performance stems from government measures to clean up a high-profile flood control scandal.

“Past corruption scandals and subsequent policy prioritization on public expenditures remain an overhang,” OCBC stressed.

Citing weaker-than-expected growth, OCBC lowered its full-year growth forecast for the Philippines to 3.2 percent from 3.8 percent. If realized, this would fall short of the government's already-reduced target range of 3.5 to 4.5 percent.

In contrast, OCBC raised its full-year growth estimates for Indonesia (to 5.2 percent from 5 percent), Thailand (to 2.4 percent from 1.5 percent), and Vietnam (to 8.2 percent from 7.3 percent).

For 2026, OCBC expects ASEAN growth to average 4.9 percent, slowing from 5.1 percent in 2025.

Despite lowering its Philippine outlook, OCBC noted in an Aug. 24 commentary that the Bangko Sentral ng Pilipinas (BSP) could still deliver a quarter-point rate hike on Thursday, Aug. 27, driven by above-target inflation.

Headline inflation eased to a three-month low of 6.2 percent in July from its April peak of 7.2 percent. Despite the cool-down, inflation remains well above the central bank’s target range of three percent to four percent.

According to Japanese financial giant MUFG Bank, Ltd., “hawkish policy guidance will support South Korean won and the Philippines peso,” even as the peso hit an intraday record low of ₱61.995 to the US dollar.

Security Bank Corp. chief economist Angelo Taningco noted that the peso is “less likely to breach 62 for the time being due to US dollar weakness globally as well as expectations for a 25-basis-point BSP rate hike this coming Thursday.”

MUFG added that the won and peso are positioned to outperform if both central banks deliver expected rate hikes and signal plans to keep borrowing costs elevated.

The peso is projected to strengthen to ₱61.750 per dollar by the end of the third quarter and ₱61.500 by the fourth quarter, before returning to the ₱61:$1 level in the first quarter of 2026. However, analysts expect the currency to weaken again in the second quarter.