Philippine economic growth could slow to as low as 1.42 percent in the second quarter as the Gulf conflict continues to weigh on the domestic economy, according to risk management consulting firm PSA Intelligence.

In a recent report, the Makati-based firm said it expects slower overall economic growth but relatively resilient export performance for the rest of the year despite mounting domestic and external risks.

"With domestic conditions tempering export performance, second-quarter gross domestic product (GDP) growth is forecast at between 1.42 percent and 4.07 percent, while full-year GDP growth is projected at between 3.5 percent and 4.5 percent," it said.

Uncertainty in the Gulf

PSA Intelligence said the conflict in the Middle East shows few signs of easing and will likely continue to fuel domestic inflation through higher global oil prices, particularly given the Philippines' heavy reliance on imported crude passing through the Strait of Hormuz.

"Since February 2026, oil shipments through the Strait of Hormuz have been cut to an estimated 15 percent of pre-conflict levels, while crude oil prices remain volatile," the firm said.

"The effects of fluctuating oil prices and supply chain disruptions are most pronounced in energy-vulnerable countries like the Philippines, which imports all of its oil and has no strategic petroleum reserve."

The firm expects domestic fuel prices to continue rising and supply chain disruptions to persist throughout 2026 as the conflict shows few indicators of sustained de-escalation. It added, however, that the appetite for prolonged conflict could diminish ahead of the upcoming US midterm elections and as global weapons and ammunition stockpiles gradually decline.

Slowing growth, rising inflation

The Gulf conflict has already weighed heavily on economic activity. GDP growth slowed to 2.6 percent in the first quarter, which the government attributed to the national energy emergency and weaker public infrastructure spending following the flood control scandal.

"Weaker household consumption and a slowdown in physical infrastructure investments led to slower economic growth in the first half of 2026. Faster inflation from oil supply shocks led to a two-percent drop in household consumption, which accounts for around 70 percent of the local economy," PSA Intelligence said.

Robust export business

Despite the broader slowdown, the firm noted that exports remained resilient, expanding 7.8 percent on the back of robust global demand for semiconductors and artificial intelligence (AI)-related equipment.

"Export performance has been bolstered by increased demand for semiconductors and electronics, the country's top exports, due to the global artificial intelligence (AI) boom. The Department of Trade and Industry (DTI) is also looking at growing global demand for ube and calamansi, alongside entering more free trade agreements (FTAs) to further boost export growth," it said.

Inflation has likewise climbed to nearly four times its end-2025 level as higher global oil prices, driven by disruptions in the Middle East, filtered through to transportation, fertilizer and selected food costs. PSA Intelligence added that the recent Metro Manila minimum wage increase, together with the continued depreciation of the peso—which fell to a record low of P61.84 against the US dollar last week—could add further upward pressure on inflation.