[In This Economy] The Philippine economy is stuck in a rut
On August 7, the Philippine Statistics Authority reported that the economy grew by a measly 2.3% in the second quarter of 2026, down from 2.8% in the first quarter.
Save for the pandemic contraction, that is our weakest quarterly growth in 16 years. A BusinessWorld poll of 21 analysts had expected 2.8%, so the actual print also undershot even the already gloomy consensus.
The regional comparison also hurts a lot. In the same quarter, Vietnam grew by a robust 8.4%, while Malaysia grew by 5.8%, Singapore by 5.7%, and Indonesia by 5.3%. Even China, weighed down by a property slump and trade tensions, managed to eke out 4.3%.
That leaves the Philippines last among nearby economies that have reported so far. (Thailand’s second-quarter data are not yet out.)
Not too long ago, government officials routinely described the Philippines as one of Asia’s fastest-growing economies. That claim no longer seems tenable. Growth has substantially slowed for four consecutive quarters: from 5.4% in the second quarter of 2025 to 4%, 3%, 2.8%, and now 2.3%.
The longer trend is even more sobering. By my estimates, real GDP is now about 21% below its pre-pandemic trend, or where output would have been had the economy maintained its average pace in the 2010s. Six years after the lockdowns, the gap is widening rather than closing.
Corruption’s growth tax
What dragged growth down? The official explanation emphasizes this year’s oil shock. The conflict in the Middle East pushed up world oil prices. And because the Philippines imports nearly all its oil, inflation averaged 4.8% in the first half of 2026 and peaked at 7.2% in April.
Much higher prices invariably ate into family budgets. Household consumption grew by just 2.8%, its weakest pace outside the pandemic since 2010. This is a significant drag in an economy where household spending makes up more than 70% of GDP.
But the national accounts point to a second, homegrown culprit. Gross capital formation (investment in construction, equipment, and inventories) contracted by 9.2% and subtracted 2.4 percentage points from growth, the largest drag among the major expenditure components.
Construction alone fell by 13.9%, while public construction collapsed by 32.4%, largely because of the fallout from the flood control corruption scandal. Projects have been suspended, contractors are under investigation, and agencies (particularly the Department of Budget and Management or DBM) have grown wary of disbursing funds.
You might reasonably call this corruption’s tax on growth. Questionable projects already wasted billions of pesos. But the cleanup, however necessary, is also subtracting from growth because the government’s construction machinery has all but stalled.
Industrial data tell more or less the same story. Services still grew by 4.5% and agriculture by 2.7%, but industry contracted by 2.4%, dragged down by construction and mining. In other words, the sectors that build physical assets and expand productive capacity are now shrinking.
Exports were the main bright spot, growing by 12.2% and contributing 3.2 percentage points to GDP growth. Without that export surge, total output would have been close to contracting. Admittedly, this is an unusual quarter where trade, long a weak point of the Philippine economy, does most of the heavy lifting.
Transitory?
During the GDP presser, Socioeconomic Planning Secretary Arsenio Balisacan called the slowdown “transitory” and ruled out stagflation, or the combination of stagnant growth and high inflation. He may be right that the oil shock will fade quickly if world prices ease.
Yet the investment problem looks persistent. Corruption investigations will take time, as they should, while business and consumer confidence tend to recover slowly. Investors are on a wait-and-see mode.
With growth averaging just 2.6% in the first half, to reach even the floor of the government’s already downgraded target of 3.5% to 4.5%, the economy must grow by about 4.4% in the second half—nearly twice its pace in the first semester.
Recall that the Marcos administration originally projected annual growth of 6.5% to 8% until 2028. To reach even the old lower bound this year, second-half growth would need to hit roughly 10.2%. That’s obviously a moonshot.
The immediate fixes are familiar: prosecute those responsible for anomalous projects, reform public procurement, restore integrity to the budget process, and restart legitimate infrastructure projects without reopening opportunities for corruption.
Yet the binding constraint is political. Many politicians and contractors benefited from the system that produced the scandal, and meaningful reform would threaten the same networks that dominate public spending.
In addition, initial reports about the National Expenditure Program (the proposed budget for 2027) tell us that the Marcos administration wants to allocate more than P107 billion in flood control projects. But specifically which projects will be funded? Exactly who will benefit? Will these eventual disbursements be credible? Has public confidence in flood control projects bounced back sufficiently to warrant another wave of flood control projects—in the run-up to the 2028 elections to boot?
By the way, the proposed budget also includes nearly P11 billion in confidential and intelligence funds—just as the impeachment trial of Vice President Sara Duterte is exposing how vulnerable to abuse these funds are.
Economists, for their part, should also estimate more precisely how much corruption is costing the country in forgone growth, jobs, and incomes. There is still little hard Philippine evidence on this, even though the costs are so huge they’re dragging down the economy.
Judging by the latest GDP figures, the costs of corruption are now undeniably showing up in the national accounts, plain for everyone to see. It’s a classic case of bad governance leading to bad economics. – Rappler.com
Jan Carlo “JC” Punongbayan, PhD is an associate professor at the University of the Philippines School of Economics (UPSE). His professional experience includes the Securities and Exchange Commission, the World Bank Office in Manila, the Far Eastern University Public Policy Center, and the National Economic and Development Authority. JC writes a weekly economics column for Rappler.com. He is also co-founder of UsapangEcon.com and co-host of Usapang Econ Podcast.
His first book, False Nostalgia: The Marcos “Golden Age” Myths and How to Debunk Them, was published by Ateneo de Manila University Press in February 2023. His second book, Twin Plagues: How Duterte and Covid-19 Wrecked the Philippine Economy, was published by Penguin Random House SEA in June 2026. Follow him on Instagram (@jcpunongbayan).
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