Philippines to shift to more sustainable growth

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February 17, 2026 | 12:00am

After taming inflation

MANILA, Philippines — The Philippines has largely won the fight to tame inflation. Now comes the harder task — turning restored policy credibility into durable growth.

As inflation settles within the Bangko Sentral ng Pilipinas (BSP)’s target range and financial buffers remain intact, the Organization for Economic Co-operation and Development (OECD) said the country has an opportunity to shift from stabilization mode to a more sustainable expansion.

In its latest assessment, the OECD said economic activity is expected to gradually strengthen as price pressures ease and domestic demand improves, giving policymakers room to recalibrate support measures while safeguarding macroeconomic and financial stability.

“As growth returns to trend, fiscal policy should remain prudent to prepare for future shocks and rising expenditure pressures, including from infrastructure investment, social protection and the climate transition,” it said.

Inflation has moderated significantly from its recent peaks and is projected to remain within the two to four percent target band of the BSP.

The easing of price pressures, the OECD noted, should help restore household purchasing power and support consumption, which continues to anchor the economy.

Growth, however, has been uneven. While the Philippines remains among the faster-growing economies in the region, recent quarters have reflected softer momentum amid external headwinds and tighter financial conditions.

The country’s gross domestic product (GDP) grew by just three percent in the fourth quarter of 2025, the lowest level since 2011 excluding the pandemic, bringing average expansion to 4.4 percent for the full-year.

The Paris-based body expects Philippine GDP to grow by 5.1 percent this year, before picking up to 5.8 percent in 2027. “Investment will recover over 2026 to 2027 as public investment normalizes and borrowing costs decline,” the OECD said.

However, the escalation of global trade tensions and persistent-than-expected weakness in public investment related to tighter corruption controls and weaker investor confidence could weigh on demand.

The Philippines must also raise annual productivity growth to achieve its target of tripling per capita income by 2040, with reforms aimed at boosting competition, attracting investment and improving governance seen as critical to sustaining high growth.

The OECD said productivity growth in the Philippines would have to increase to 5.2 percent over 2025 to 2040 from 4.5 percent in the pre-pandemic period.

“Sustaining high growth will increasingly depend on boosting productivity,” it said.

Local economists share the view that stability has improved, but warn that structural weaknesses remain.

Jun Neri, lead economist at Ayala-led Bank of the Philippine Islands, said easing inflation in 2024, election spending and BSP rate cuts were expected to boost demand. But these improving conditions failed to translate into faster growth.

“Economic momentum weakened sharply in the second half of 2025, largely due to a steep decline in construction activity,” Neri said, adding that the broad weakness in construction resulted in a sharp contraction in investment spending.

Consumer spending also grew by just 3.8 percent in the fourth quarter last year, also the slowest pace since 2010 outside the pandemic.

“Negative sentiment likely dampened the appetite for spending, while the relief from lower inflation failed to generate stronger consumption growth,” Neri said.

Neri said the Philippine economy still managed to grow by three percent in the fourth quarter with household spending as the main anchor. However, the slowdown would not have been as severe if the country had other strong sources of expansion.

“Even with the sharp decline in government construction spending, growth might have been more acceptable if the production sectors had been in a stronger position to offset the drag, specifically agriculture and manufacturing,” he said.

He noted that even if public expenditure normalizes in 2026, the underlying vulnerability will persist unless the country broadens its sources of growth. A more diversified economy would be better equipped to absorb future crises and shocks.

More focus should therefore be directed toward reinforcing key production sectors such as agriculture, manufacturing and construction, backed by high-quality infrastructure that improves the economy’s productive capacity.

“The economy remains strong on the demand side, but it is still unable to produce a significant portion of what it consumes. The country continues to import a substantial share of consumer and capital goods, which limits competitiveness and constrains long-term growth prospects,” he said.

Neri said GDP growth may remain weak in the first half of 2026, but a rebound is possible in the second half. He expects full year GDP growth to settle at 5.1 percent this year.

Credibility as capital

For conglomerates and large corporates, the stability of inflation and interest rates has become a strategic anchor.

SM Investments Corp. group economist Robert Dan Roces said policy credibility now matters more than the absolute level of rates.

“What the BSP has also restored is policy credibility, so that reduces the risk area. It actually lowers uncertainty and helps boards commit capital. From a private sector standpoint, that is not abstract. It’s strategic for us,” he said.

Inflation had reached multi-year highs in 2023, forcing the BSP to raise policy rates by a total of 450 basis points from 2022 to 2023. As tighter monetary policy took hold, price pressures eased. Even as the central bank unwinds 200 basis points of those hikes, inflation has remained stable, slowing to just two percent in January.

While headline growth has slowed, Roces said the composition of activity deserves closer attention.

“Growth may have slowed, but the structure matters,” he said. “If domestic demand remains intact while distortions are corrected, that suggests the slowdown is actually cyclical. It’s not structural. So that distinction gives private capital more confidence.