The Philippine economy posted its weakest growth in five years in the first quarter of 2026 as inflation, geopolitical tensions and weakening investor confidence dragged on domestic activity despite steady gains in exports and services.

Gross domestic product expanded by only 2.8 percent during the January-to-March period, marking the slowest pace since the height of the pandemic in 2021. 

Economists and industry groups pointed to slowing investments, softer household spending and rising business uncertainty following the flood control corruption controversy and the escalating conflict in the Middle East.

Positive consumer spending 

While consumer spending remained positive, higher inflation eroded purchasing power, dampening demand across several sectors. Manufacturing activity also weakened sharply, with the April Purchasing Managers’ Index falling to 48.3, its first contraction since November last year.

Still, the economy managed to avoid a sharper slowdown as exports grew by 7.8 percent and the services sector expanded by 4.5 percent, helping offset weakness in domestic industries.

Federation of Philippine Industries (FPI) chairperson Elizabeth H. Lee said the latest figures exposed deeper structural vulnerabilities in the economy despite signs of resilience.

Economy still resilient 

“Even in a quarter of slowdown, the strength of exports and services shows that the Philippine economy retains resilience and capacity for recovery,” Lee said.

“But resilience alone is not enough — this moment must be treated as a structural inflection point.”

Lee said the recent slowdown highlighted the country’s continued exposure to external shocks, particularly in energy and industrial supply chains.

“Energy resilience and industrial diversification are critical. Import dependence and energy vulnerability amplify every external shock,” she said.

“A more diversified energy base and stronger industrial policy must complement services-led growth.”

Governance and public spending concerns

Business confidence also took a hit during the quarter as concerns over governance and public spending intensified following the controversy surrounding flood control projects.

According to Lee, restoring investor trust would require long-term transparency and accountability reforms rather than short-term assurances.

“Credibility is not restored overnight — it is built through consistent quarters of transparent, accountable governance,” she said.

“Each step toward verifiable procurement reform strengthens trust and signals to investors that the Philippines is committed to a new era of integrity and opportunity.”

Despite the weak quarter, industry leaders said opportunities remain for the Philippines as global manufacturers continue diversifying operations away from traditional production hubs.

Lee noted that rising exports and the gradual easing of foreign investment restrictions could still position the country to attract new capital inflows, particularly as ASEAN economies compete for manufacturing expansion.

Fundamentals intact even in slowdown

“Even in slowdown, the fundamentals remain intact. Exports are rising, services are expanding, and ASEAN manufacturing opportunities are opening at our doorstep,” she said.

She added that the current slowdown could ultimately become a turning point if the government accelerates reforms in governance, infrastructure, energy, and industrial development.

“We can turn this hard lesson into a structural opportunity,” Lee said.