OECD Economic Outlook, Volume 2025 Issue 1

Philippines

Real GDP is projected to grow by 5.6% in 2025 and 6.0% in 2026. Private consumption will be bolstered by a strong labour market and low inflation, while investment is projected to pick up modestly on the back of easing financial conditions and increased public infrastructure spending. Inflation is anticipated to remain contained at 2.0% in 2025 and 3.1% in 2026 amid balanced domestic demand and currency stability. Risks are broadly balanced. On the downside, a larger-than-expected slowdown in major economies, including the United States or China, could reduce demand for Philippine exports and affect remittance inflows, impacting domestic consumption and investment. On the upside, recent reforms to reduce barriers to foreign direct investment could boost investment.

Monetary policy is expected to continue to ease over 2025 and 2026 to a more neutral stance. Fiscal policy is projected to be moderately restrictive in both 2025 and 2026, with a gradual reduction of the fiscal deficit from 5.7% of GDP in 2024 to 4.6% in 2026. Complementing recent pro-competition reforms with measures to streamline regulations across the economy – including in key network sectors such as energy, telecommunications and transport – is key to lift investment from relatively low levels.

Economic growth is stable

Real GDP grew by 5.4% in the first quarter of 2025, supported by robust household and government consumption, as investment went through a soft patch. Economic activity has been underpinned by a strong labour market, with unemployment reaching 3.9% in March, among the lowest values in two decades. Low inflation has supported real household incomes and exposure to higher US tariffs has been relatively limited, with merchandise exports to the United States amounting to around 2½ per cent of GDP, but high borrowing costs have continued to weigh on investment. While industrial production and tourist arrivals have declined in annual terms, business sentiment has remained resilient, suggesting broadly stable growth in the first half of 2025.

Headline inflation has come down to 1.4% in April, with core inflation at 2.2% remaining within the central bank’s target band of 2-4%. Declining food and fuel prices drove the decline in headline inflation, while core inflation continued to ease on the back of moderate domestic demand growth. The exchange rate has remained broadly stable since the beginning of the year and global energy prices have come down, easing price pressures.

Philippines

1. Year-on-year growth rates. Seasonally non-adjusted data.

2. Annual rates. The shaded area corresponds to the central bank’s inflation tolerance band.

Source: Philippine Statistics Authority; and CEIC.

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Philippines: Demand, output and prices

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Monetary policy easing will offset mild fiscal consolidation

The central bank initiated the ongoing monetary easing cycle in August 2024, bringing the policy rate from 6.5% to 5.5% in April 2025. With real GDP expected to grow below trend and stable inflation expectations, there is room to continue the easing cycle over 2025-26 to bring the policy rate to a more neutral level of around 4.75-5% in the latter half of 2026. Fiscal policy will be slightly restrictive over 2025‑26, as the authorities are expected to continue gradual fiscal consolidation to put public debt – currently at around 60% of GDP – on a declining path. The overall macroeconomic policy mix strikes a balance between fiscal prudence and support to growth among global headwinds.

The economy will grow around trend

Real GDP will grow by 5.6% in 2025 before picking up slightly to 6% in 2026. Household consumption is expected to remain robust, as strong labour market performance supports real household incomes amid low inflation. Investment will recover in the first half of 2025 as borrowing costs decline, but the recent escalation of global trade tensions is expected to weigh on external demand and export revenues. Inflation is expected to rise gradually to the mid-point of the central bank’s target range, as temporary effects from lower food and global energy prices fade. Risks are broadly balanced. A sharper‑than-expected global economic slowdown – especially in the United States and China – could weaken demand for exports and dent remittances, weighing on consumption and investment. On the upside, the recent liberalisation of foreign investment rules and enhanced fiscal incentives offer a chance to offset headwinds from exports with higher capital inflows.

Structural reforms are needed to boost growth

To foster broad-based economic growth, the Philippines should build upon recent pro-competition reforms, such as the amended Public Services Act that reduced barriers to foreign investment in services. Further streamlining regulations across key network sectors, such as energy, telecommunications and transport, can reduce barriers to entry and encourage private investment. Addressing labour market challenges is crucial to boost productivity and provide workers with greater security. This includes reforms to reduce non-wage labour costs and ease rigidities in labour market regulations, which would help incentivise businesses to formalise employment. Enhancing women's participation in the labour force through improved access to affordable childcare and flexible work arrangements would enable the Philippines to leverage its substantial human capital, thereby fostering economic growth and reducing gender disparities in employment.