Is the Philippines approaching stagflation?
Stagflation is defined by three conditions: high inflation, stagnant growth, and rising unemployment.
Let’s take a closer look at each.
The Philippines’ heavy reliance on imported oil has amplified inflationary pressures as the US-Iran conflict disrupted the global oil supply chain. Inflation in the past two months moved past the upper bound inflation target of the Bangko Sentral ng Pilipinas (BSP).
Although year-to-date inflation is still within target at 3.9%, projections are still skewed to the upside. And it’s not only oil prices and their associated second-round effects. The projected El Niño phenomenon this year may further exacerbate the situation.
The unemployment rate has edged slightly higher this year, with the year-to-date figure settling at 5.3%. Even if it is higher than the annual unemployment rate compared to previous years since 2023, it remains lower than the 10-year pre-pandemic historical unemployment rate of 6.3%.
Although risks to unemployment remain on the upside, unemployment is expected to remain broadly stable, supported by resilience in the services sector which continues to expand despite the soft economic growth outlook.
These suggest only a partial fulfillment of stagflation conditions, especially as growth is expected to rebound next year, and provide support to the labor market.
Taken together, the current conditions still fall short of stagflation. Instead, the economy appears to be in a phase of “slowflation” — characterized by elevated inflation, slowing but positive growth, and a still-resilient labor market.
This “slowflation” has made the policy environment for both monetary and fiscal authorities increasingly complex. Although the BSP is expected to tighten monetary policy this year, it may eventually reverse course, as a prolonged high-interest-rate environment could further dampen already weak economic growth.
As current inflation is largely supply-driven, the effectiveness of monetary policy is limited. With this, the government has implemented fiscal measures to mitigate the impact of rising prices, including targeted subsidies, tax relief, and other social support.
The suspension of excise taxes on kerosene and LPG may alleviate the impact, but these fuels represent only a small share of overall consumption. Diesel and gasoline, which are more widely used, are still subject to excise taxes and continue to lead to second-round effects, limiting the overall effect on inflation.
The domestic economy remains fragile and highly sensitive to geopolitical developments, with ongoing local political squabbles weighing on overall sentiment. For now, while stagflation risks are rising, the Philippines remains in the early phase of “slowflation”.
For investors, the heightened risk of stagflation suggests an upward shift in the Philippine yield curve, driven by rising inflation expectations and a higher projected policy rate. In this environment, the recommendation is to maintain a defensive position in the 2- to 5-year space. Meanwhile, subdued economic growth signals fragility in the local equity market, supporting a neutral to slightly bearish stance.
MARIAN MONETTE FLORENDO OBIAS is a Research Officer of the Research and Market Strategy Department, Institutional Investors Coverage Division, Financial Markets Sector, at Metrobank. She is a Certified Treasury Professional and holds an undergraduate degree in Mathematics from Ateneo de Naga University and an MA Economics degree from UP Diliman. She loves traveling and watching mystery movies in her spare time.
