The Philippine economy is likely to encounter a more difficult second half of the year as inflation, weaker public spending and mounting artificial intelligence (AI) disruption weigh on growth, although several bright spots are expected to keep the outlook from turning negative, according to the ASEAN+3 Macroeconomic Research Office (AMRO).

In its latest assessment, AMRO described the country’s near-term outlook as “cautiously optimistic,” saying strong semiconductor exports, AI-driven global investment and other growth drivers could help offset mounting domestic and external pressures.

Weaker footing than expected

The regional think tank said the economy started 2026 on weaker footing than expected, with gross domestic product growth slowing for a third straight quarter to 2.8 percent in the first quarter. Inflation also accelerated to 6.45 percent in June.

AMRO identified three major risks that could restrain economic activity over the coming months: persistently high inflation, reduced public investment and increasing pressure on service exports as AI adoption reshapes global business operations.

As a major net importer of energy, the Philippines has been particularly vulnerable to higher oil prices stemming from tensions in the Middle East, driving up transport and food costs. Core inflation reached 4.4 percent in June, its highest level in more than two years.

The report projects average headline inflation to reach 6.0 percent this year, a sharp increase from 1.7 percent in 2025, and expects inflation to remain above the Bangko Sentral ng Pilipinas’ 2- to 4-percent target range through 2027.

Public investment has also softened following corruption allegations that emerged in 2025, leading to delays and cancellations of several infrastructure projects. Public construction contracted 31.5 percent year-on-year during the first quarter.

Investment spending to improve 2H 2026

AMRO said investment spending should gradually improve during the second half, although the pace of recovery will largely depend on how quickly strategic projects such as roads, bridges, schools and health facilities resume.

The report also flagged growing risks to the country’s information technology and business process management sector, noting that many Philippine service exports remain concentrated in routine functions increasingly susceptible to AI-driven automation.

Exports of information and communication technology and other business services expanded just 4.4 percent, marking their slowest growth in five years. Tourism has likewise yet to fully recover to pre-pandemic levels.

Despite these challenges, AMRO believes several factors could help sustain growth.

Surge in AI-related investments

Foremost among them is the global surge in AI-related investments, which continues to boost demand for semiconductors and other electronics. Electronics account for more than half of Philippine merchandise exports, making the sector a key pillar of external growth.