HSBC strategists warn that the Philippines is flirting with stagflation, as slowing Gross Domestic Product (GDP) growth coincides with the highest inflation in ASEAN. Weak public spending and cautious households are dragging demand, while the labour market softens. They expect growth to stay below potential in 2026–2027 but sees scope for a relatively quick market recovery once the energy shock fades.

Growth slows while inflation accelerates

"Stagflation appears to be emerging in the Philippines. For one, growth continues to sour. In 1Q26, growth came in at 2.8% y-o-y, stumbling to its slowest pace since 2009, excluding the COVID-19 pandemic."

"The culprits of the slowdown remain the same: public capital disbursements continue to fall at a significant rate while the uncertainty around public spending has led to households and businesses pulling back on their expenditures. Savings are up, and investment is down."

"Unfortunately, this slowdown in demand has already spilled over to the labour market. The unemployment rate in the Philippines has risen above 5%. And soon, households and small businesses may need to dip into the savings they have recently accumulated."

"This is because prices continue to rise amid slow growth. Currently at 6.8% y-o-y, headline inflation in the Philippines is the highest in the ASEAN region."

"Once the energy shock normalises, financial markets in the Philippines are likely to recover quickly. This is because the fiscal response has remained prudent, as officials opted for targeted welfare measures."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)