World Bank Forecasts 2.7% Fall in Philippine Fixed Investment as Infrastructure Delays Deepen Slowdown

Investment forecast worsens despite planned recovery

The World Bank expects Philippine fixed investment to shrink by 2.7% in 2026, a deeper contraction than the 0.5% decline projected in August, as stalled infrastructure projects and expensive energy weaken spending on buildings, machinery and other productive assets. The revised forecast represents a deterioration of 2.2 percentage points in just two months.

In its October 2026 Macro Poverty Outlook, the bank projects economic growth of 3.7% this year, followed by 5.2% in 2027 and 5.5% in 2028. Fixed investment is expected to rebound by 9.5% in 2027 and grow by another 7.4% in 2028, provided public investment recovers.

The immediate picture is much weaker. The economy grew by 2.6% in the first half of 2026, while fixed investment fell by 13.7% in the second quarter. Higher fuel and electricity costs have squeezed company profits and household purchasing power, while tighter infrastructure screening has held up government projects and weakened private confidence.

The World Bank, the development institution responsible for the forecast, described the combined constraints in its October assessment:

Infrastructure delays weakened investment and private sector confidence, while elevated debt and borrowing costs constrain countercyclical support.

The warning puts project execution at the center of the recovery. Restoring spending requires credible approvals and procurement, not simply a larger budget. At the same time, inflation has forced the central bank to raise interest rates, making financing more expensive when businesses and households are already spending cautiously.

How the investment decline developed

Gross fixed capital investment measures spending on assets used over several years, including roads, factories, buildings and equipment. It differs from the broader measure of gross capital formation, which also includes changes in inventories. That distinction matters: total capital formation fell by 9.2% in the second quarter, while its fixed investment component dropped by 13.7%.

The annual figures show that investment was losing momentum before the latest energy shock. Fixed investment growth slowed from 6.3% in 2024 to just 0.8% in 2025. The projected 2.7% contraction in 2026 extends that deterioration.

The quarterly record and forecast revisions trace the slowdown:

• Mid 2025: Allegations of infrastructure corruption prompted greater scrutiny and audits of project planning, budgets and procurement.
• Third quarter of 2025: Fixed capital formation began a run of three consecutive quarterly contractions that continued through the first quarter of 2026.
• First quarter of 2026: Fixed capital formation fell by 2.5%, while GDP grew by 2.8%.
• Second quarter of 2026: Fixed capital formation contracted by 13.7%, while GDP growth slowed to 2.3%.
• August 3, 2026: The World Bank projected a 0.5% annual investment contraction and cut its GDP growth forecast to 3.7% from 5.3%.
• October 2026: The bank deepened its investment contraction forecast to 2.7%, while retaining its 3.7% GDP growth projection.

The second quarter investment decline was the steepest since the 18.2% fall in the first quarter of 2021. Excluding the pandemic period, it was the weakest result since the second quarter of 2011. Those comparisons describe the same downturn using different historical benchmarks.

Flood control scrutiny stalls public construction

General government construction plunged by 32.4% in the second quarter of 2026. Economy, Planning, and Development Secretary Arsenio Balisacan linked the decline to reluctance among officials to approve projects or accept responsibility after the flood control scandals of 2025.

Balisacan said the size of the decline made public construction a substantial drag on growth, despite its relatively small share of the economy:

Although public construction is a small part of the economy, the amount of that contraction, 32%, brought a significant impact on the economy,

He estimated that GDP growth could have been at least one percentage point higher if public construction had remained unchanged rather than contracting. Separately, the ASEAN+3 Macroeconomic Research Office, known as AMRO, estimated that public construction had already fallen by 31.5% in the first quarter.

The investigations followed government disclosures that 9,855 flood control projects worth about P545 billion had been funded from July 2022 to May 2025. An initial audit identified roughly P100 billion in spending directed to just 15 contractors. Authorities also flagged projects alleged to be substandard, poorly documented or nonexistent.

The scrutiny led to Senate and Commission on Audit inquiries, an independent infrastructure commission and the suspension of bidding for locally funded flood control projects by the Department of Public Works and Highways. The allegations and audit findings should not be treated as final determinations of liability.

The World Bank has argued for improving governance while preventing prolonged uncertainty from freezing legitimate investment. At the August economic update launch, Zafer Mustafaoglu, its division director for the Philippines, Malaysia and Brunei, described the effect on private capital:

Uncertainty around infrastructure procurement has made investors more hesitant,

Contract awards offer a possible turning point

There were early signs of movement before the October forecast. Balisacan said the Department of Budget and Management began releasing infrastructure mobilization funds toward the end of June, and the public works department started awarding contracts in June and July.

Those steps led the government to expect construction spending to pick up in the third quarter and accelerate toward the end of 2026 as agencies used funds left unspent during the first half. Contract awards, however, do not establish how quickly construction will progress or how much spending will reach the economy.

The World Bank has said progress on infrastructure governance by late 2026 will affect whether investment recovery begins in 2027 or is delayed further. Transparent approval criteria, consistent procurement standards and credible communication about restarting projects are central to that process.

Jaffar Al-Rikabi, the World Bank's senior country economist, explained at the August launch that stronger governance and timely execution need to advance together:

The key here is to really continue, as the government has been doing, on improving governance of public infrastructure to send a signal to the market, but to do so efficiently and effectively,

The October projection of 9.5% investment growth in 2027 is therefore conditional, rather than evidence that a recovery is already secured. The unresolved issue is how quickly clearer rules and new contracts translate into completed work and renewed private commitments.

Energy inflation weakens spending and employment

The infrastructure slowdown has coincided with an energy shock that affects both production costs and everyday expenses. Inflation averaged 4.8% in the first half of 2026 and reached 6.2% in July. The World Bank forecasts annual inflation of 5.8%, compared with 1.7% in 2025.

The pressure was greater for the poorest 30% of households, whose inflation rate reached 8.2% in July, driven by food costs. That was two percentage points above the headline rate. Rising core inflation, which strips out some volatile prices, also indicated that price increases were spreading beyond the initial energy shock.

Household spending grew by only 2.8% in the second quarter, its weakest result outside the pandemic since the third quarter of 2010. Balisacan attributed the slowdown to higher prices, job losses, weaker confidence and softer remittance receipts linked to the Middle East conflict.

The World Bank expects annual private consumption growth to slow from 4.5% in 2025 to 3.4% in 2026, before recovering to 4.5% in 2027 and 4.9% in 2028. Services remained the main driver of growth in the first half, but activity slowed as households reduced discretionary spending.

Employment weakened as well. The bank reported that unemployment rose from 3.7% to 4.9% in June, while labor force participation fell. Job losses were concentrated in agriculture, fishing and construction, making the combination of lower earnings and higher food prices particularly difficult for vulnerable households.

Despite slower growth, the Bangko Sentral ng Pilipinas raised its policy rate by 75 basis points, equivalent to 0.75 percentage point, to contain inflation expectations and prevent price pressures from spreading. The World Bank cautioned that tighter monetary policy could also restrain investment and consumption in the near term.

A smaller deficit does not mean more room to spend

The fiscal deficit narrowed to 5.4% of GDP in the first half of 2026, alongside a 3.0 percentage point decline in capital outlays. Tax and other revenues were broadly unchanged from a year earlier. The improvement therefore reflected sharply lower investment spending rather than a major increase in revenue.

For the full year, the World Bank projects a deficit of 4.8% of GDP, down from 5.6% in 2025. Yet national government debt is expected to rise from 63.2% to 65% of GDP. A smaller annual deficit can coexist with a rising debt ratio because the government still borrows, while weaker economic growth limits the expansion of the GDP denominator.

The bank expects the debt ratio to ease to 64.1% in 2027 and 63.4% in 2028. Even then, it would remain slightly above the 2025 level. Higher borrowing costs and elevated debt restrict the government's ability to counter a downturn through additional spending.

Government consumption is nevertheless projected to grow by 9% in 2026, compared with 8.4% in 2025, before easing to 8.2% in 2027. That does not contradict falling fixed investment: government consumption covers current services and operations, while infrastructure is counted as capital spending.

The World Bank's October report recommends protecting productive projects while improving spending efficiency:

Improving the quality and efficiency of public investment would support infrastructure delivery and crowd in private capital without weakening fiscal discipline,

In practical terms, the recommendation is to preserve infrastructure with strong economic benefits while making project selection and delivery more reliable. Cutting capital spending may narrow a deficit quickly, but prolonged delays can also weaken the growth needed to manage debt.

Exports provide support, but imports add pressure

Exports offered a counterweight to weak domestic demand in the second quarter. Goods exports rose by 17%, services exports increased by 6.9%, and net exports contributed 1.2 percentage points to GDP growth. Agriculture grew by 2.7%, while manufacturing expanded despite a 2.4% contraction in the broader industry sector.

Electronics were particularly strong. Consumer electronics exports increased by 230.3%, while exports of components and devices, including semiconductors, rose by 13.4%. Balisacan linked demand to artificial intelligence systems, electric vehicles and other advanced technologies.

The World Bank likewise identified the global artificial intelligence investment cycle as support for semiconductor exports. Its October forecast puts annual growth in exports of goods and services at 9.1% in 2026, compared with import growth of 5.5%.

Those growth rates do not mean the external deficit has disappeared. The merchandise trade deficit widened by 34.9% compared with a year earlier in July as higher energy prices increased the import bill. The bank linked that deterioration to pressure on the current account and the peso, while noting that reserve coverage remained comfortably above adequacy benchmarks.

The current account, which includes trade, services and income flows, is forecast to post a deficit of 3.4% of GDP in 2026 and 3.8% in 2027. Net foreign direct investment inflows are projected at 1.7% of GDP this year, only slightly above 1.6% in 2025, and at 1.8% in both 2027 and 2028.

Growth forecasts differ on the speed of recovery

The World Bank's 3.7% growth forecast falls within the government's reduced 2026 target of 3.5% to 4.5%. Balisacan said reaching even the lower end would require growth of at least 4.4% in the second half, making a construction rebound and easing inflation central to the target.

AMRO is more cautious. Its October update projects Philippine growth of 3.3% in 2026 and 4.6% in 2027, below the World Bank's forecasts by 0.4 and 0.6 percentage point respectively. AMRO had forecast 4.1% and 5.5% in July, then lowered those estimates to 3.4% and 4.8% following its August consultation.

At an October 5 briefing, AMRO chief economist Dong He said the pace of construction recovery would be decisive:

So the growth outlook is very dependent on how fast public investment and construction-related activities can pick up,

AMRO also identified investor concerns about the current account deficit, delayed infrastructure, growth and corporate earnings. It pointed to remittances, the information technology and business process management industry, and established monetary and fiscal policy frameworks as buffers.

The differences are forecasts, not competing measurements of completed economic activity. Before the second quarter GDP announcement, Bank of the Philippine Islands lead economist Emilio Neri Jr. had expected growth of 1.9%; the Philippine Statistics Authority subsequently reported 2.3%.

The World Bank lists a prolonged Middle East conflict, severe El Niño conditions and a smaller public investment program than expected as risks to recovery. Its projected return to stronger growth depends on both domestic execution and relief from external price pressures.

Income milestone leaves poverty and electricity challenges

The slowdown comes as the Philippines reaches upper middle income status, a milestone announced in the World Bank's August 3 Economic Update release. That classification reflects average national income, not the financial security of every household.

The October outlook estimates that 58.7% of Filipinos, about 66 million people, lived below the international poverty threshold of $8.30 per person per day in 2023. The threshold uses 2021 purchasing power parity, which adjusts for differences in prices across countries; it is not a simple dollar amount converted at the current exchange rate.

The bank estimates that the share declined to 56.1% in 2025 and projects 55.2% in 2026 and 52.7% in 2028. The 2023 figure is based on actual data, while subsequent figures are estimates or forecasts. Higher inflation and weaker employment are expected to slow progress this year, rather than reverse it in the bank's baseline projection.

The August update recommends temporarily extending the 4Ps conditional cash transfer program to households just above the poverty threshold. The bank estimates that this could help prevent about two million Filipinos from falling into poverty because of the energy shock. It is a policy recommendation, not confirmation that the expansion has occurred.

Electricity costs are another proposed area for reform. The update models a scenario in which renewable energy reaches 35% of the energy mix by 2030, alongside investment in transmission, storage and grid flexibility, plus reforms to market competition.

Under those conditions, the bank estimates residential electricity prices could fall by up to 28% in the near term, approximately 161,000 jobs could be created, and around 730,000 people could move out of poverty. These are modeled results, not guaranteed outcomes from renewable capacity alone.

The connection to the investment slowdown is direct: lower business costs, dependable infrastructure delivery and stronger household protection would address different parts of the same squeeze. None substitutes for resolving the procurement uncertainty that is holding projects back.

Key Points

• The World Bank forecasts a 2.7% fall in Philippine fixed investment in 2026, deeper than its August projection of 0.5%.
• Second quarter fixed investment fell by 13.7%, while government construction declined by 32.4%.
• The bank projects GDP growth of 3.7% in 2026 and 5.2% in 2027; AMRO forecasts 3.3% and 4.6%.
• July inflation reached 6.2%, compared with 8.2% for the poorest 30% of households.
• Government debt is projected to reach 65% of GDP despite a smaller fiscal deficit.
• The projected 2027 investment rebound depends on infrastructure execution, clearer governance and easing price pressures.