The Philippines Faces a Twin Crisis: Record-Low Growth and Oil Vulnerability

No large Asian economy has absorbed the Middle East energy shock as badly as the Philippines, and the second-quarter figures show how deep it has reached.

Gross domestic product grew 2.3% year on year in the second quarter, slowing from 2.8% in the first quarter and from 5.4% in the same period last year. It was the fourth consecutive quarterly deceleration, and the weakest reading since the fourth quarter of 2009 excluding the pandemic period.

The sectoral split shows where the damage concentrated. Agriculture grew 2.7% and services 4.5%, while industry contracted 2.4% year on year.

First-half growth averaged 2.6%. Socioeconomic Planning Secretary Arsenio Balisacan said the economy must grow 4.4% in the second half to reach the government's 3.5% to 4.5% full-year target — a demanding requirement given the trajectory of the past four quarters.

Why the Philippines is more exposed than its neighbours

The vulnerability is structural and unusually concentrated. The country imports the overwhelming majority of its crude from the Middle East, leaving it directly exposed to any disruption around the Strait of Hormuz in a way that regional producers and more diversified importers are not.

That exposure has been reflected in policy. President Ferdinand Marcos Jr declared a national energy emergency in late March, reported as the first such declaration globally during this crisis, after fuel reserves fell sharply.

Analysts have made the same assessment from the outside. Singapore's DBS Bank has described the Philippines as among Southeast Asia's most vulnerable economies to the oil price shock, citing relatively modest domestic subsidies. MUFG, downgrading its 2026 growth forecast to 3.5%, attributed peso weakness to the country's position as a net energy importer during a period of elevated oil prices and geopolitical uncertainty.

Analysts have warned that a prolonged closure of the strait could push crude substantially higher, which for an economy in this position is the central risk to the outlook.

Inflation is easing from a very high base

The one improving trend is real, but it starts from a difficult place.

Inflation softened to 6.2% in July from 6.4% in June, a third consecutive month of easing after reaching a three-year high of 7.2% in April, with a relative slowdown in transport costs tempering the overall increase. Average inflation for January to July stood at 5.0%, well above the government's 2% to 4% target range.

Transport is the component to watch, and it illustrates the mechanism precisely: transport inflation slowed to 12.8% in June from 16.2% in May on lower fuel pressures, while remaining the single largest contributor to the headline rate.

Core inflation is the less encouraging number. It reached 4.1% in June, the highest since December 2023, indicating the energy shock has moved beyond fuel into the broader price structure.

The central bank has been caught between the two. Bangko Sentral ng Pilipinas held its policy rate at 4.25% at an unscheduled meeting in March, pausing an easing cycle that had delivered 225 basis points of cuts since August 2024, and raised its 2026 inflation forecast. It has noted that the risks are largely supply-driven and therefore less responsive to monetary policy, while warning that raising rates would delay the recovery.

What is actually working

The quarter was not uniformly weak, and Balisacan pointed to genuine areas of strength.

Agricultural output recovered on favourable weather. Manufacturing growth improved. Exports of goods and services gained momentum, with stronger semiconductor exports supported by global demand for AI-related products helping net exports rebound.

That last point connects the Philippines to a pattern visible across the region this quarter — the same AI-driven electronics cycle lifting Malaysian and Hong Kong exports is providing a partial offset here. It is not large enough to counteract a 2.4% industrial contraction, but it is the component moving in the right direction.

The peso, meanwhile, weakened back toward 61 to the dollar in early August after briefly touching a six-week high, as markets reassessed the growth and inflation outlook.

What to watch

The second-half growth requirement is the immediate test. Reaching 4.4% after four quarters of deceleration would require a sharp reversal, and the government's own target range is at risk.

The second is the BSP's next decision. With core inflation at a two-year high and growth at a sixteen-year low excluding the pandemic, the Monetary Board faces the sharpest version of the supply-shock dilemma in the region. Some market participants have positioned for a hike.

The third is oil. Every element of this — the inflation rate, the peso, the industrial contraction, the policy bind — traces back to a commodity the Philippines has almost no domestic supply of.