he Philippines must diversify its export markets and move up global value chains (GVCs to cushion the impact of mounting external headwinds—from slowing major trading partners and new tariff measures to rising protectionist sentiment—according to a new outlook report.
A discussion paper on Philippine macroeconomic prospects for 2025–2026, citing government data, noted that gross domestic product (GDP) grew by 5.7% in 2024—an improvement from the previous year but still below the government’s revised target range of 6.0% to 6.5%.
Looking ahead, the paper described the country’s medium-term outlook as “cautiously positive,” warning that persistent and emerging vulnerabilities will shape growth performance over the next two years. These include inflation volatility, exchange rate fluctuations, fiscal constraints, and external shocks such as potential US tariff escalation, supply-chain realignments under the Regional Comprehensive Economic Partnership (RCEP), and climate-related disruptions.
“These factors will determine the country’s ability to sustain inclusive, resilient, and investment-led growth in the coming years,” the report said.
Despite these pressures, the economy is still expected to expand moderately. Real GDP growth is projected at around 5.0% in 2025 and 5.3% in 2026, remaining below potential output.
The paper pointed to a modest negative output gap, reflecting subdued private investment, underutilized labor amid rising underemployment, and long-standing structural constraints across manufacturing, trade, tourism and hospitality, and infrastructure.
The outlook, released this month by the Philippine Institute for Development Studies (PIDS), hinges on the country’s ability to implement bold structural reforms, strengthen governance, improve manpower quality, build resilience to shocks, and adapt to a rapidly evolving global trade and financial environment.
“Persistent institutional weaknesses—particularly corruption and weak public investment returns—continue to weigh on growth prospects,” the paper said. It cited high-profile infrastructure controversies, including alleged irregularities in flood control and so-called “ghost” projects, as factors that have eroded investor confidence and weakened the effective use of public funds.
The governance drag, the authors warned, increases the risk that the Philippines remains trapped in middle-income status, where growth stalls without a sustained productivity boost.
On the external front, merchandise trade activity accelerated in 2024, with imports rising by 4.2% and exports by 3.3%, translating to a 6.5% increase in net exports, according to the PIDS authors—John Rivera, Mark Ruiz, and Ramona Miral.
However, imports continued to outpace exports, sustaining a long-standing trade deficit driven largely by strong demand for intermediate goods, raw materials, and capital equipment used in domestic production.
Trade performance in 2025 showed sharp quarterly swings. Net exports surged by 19.1% in the first quarter but contracted by 0.7% in the second quarter as global headwinds intensified.
Ongoing US-China technology tensions and recent tariff announcements by the Trump administration—including a proposed 100% tariff on imported semiconductors—have renewed uncertainty for the Philippines’ export sector.
“The slowdown among major trading partners, which together account for more than 50% of Philippine exports, poses downside risks to external demand,” the paper said. “A prolonged US-China technology confrontation, compounded by new tariff measures and rising protectionist sentiment, could weigh on both merchandise and services exports.”
As a result, export demand in the near term is expected to be “softer and more volatile,” particularly as global growth remains subdued and trade tensions elevated.
To mitigate these risks, the study urged the Philippines to enhance external competitiveness by diversifying its export base, moving up global value chains, and reducing reliance on single-country markets. It emphasized deepening integration within ASEAN and maximizing opportunities under RCEP.
The report also recommended exploring expanded trade engagement with the European Union, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the BRICS bloc, and the G20 economies.
However, the paper cautioned that diversification alone will not be sufficient if the peso remains overvalued—a concern that could undermine export competitiveness as well as the business process outsourcing (BPO) and tourism sectors.
“Government must also mitigate the cost disadvantage posed by an over-strong currency,” the report said.