THE weakness in investment spending was also evident in durable equipment, which contracted by 13.6% during the quarter. Firms were not only delaying construction activity but also scaling back purchases of equipment. The decline was driven largely by weaker spending on machinery and transport equipment. Road transport equipment fell 28.4%, likely reflecting the combined impact of elevated fuel costs and weaker demand conditions on vehicle purchases. Spending on mining and construction machinery plunged 42.7% as construction firms reduced their equipment purchases.
One notable bright spot was the continued strength in energy-related investment. Spending on power-generating machinery increased by 23.3% year-on-year following a 103.9% growth in 1Q.
Weakness in investment spending is concerning not only because it weighed on economic growth during the quarter, but also because of its implications for the economy's future growth potential. Prolonged weakness in investment can eventually limit the economy's ability to expand output. If investment spending remains weak due to elevated inflation, policy uncertainty, and softer demand conditions, the economy could emerge from the current slowdown with a lower growth potential than before.
Consumer demand also remained soft during the quarter, with household consumption expanding by only 2.8%. A closer look at spending patterns suggests that households became increasingly selective in their expenditures, allocating a larger share of their budgets toward essential goods and services while cutting back on discretionary purchases.
Spending on restaurants and hotels contracted by 0.2%, marking the first decline since the height of the pandemic in 2021, while spending on recreation and culture fell by 0.8%. The effects of the oil shock were also visible in transportation-related spending with expenditures on transport declining by 7.5% year-on-year.
Despite these headwinds, the consumer sector displayed a degree of resilience. Household consumption managed to avoid a contraction despite the sharp increase in consumer prices during the quarter.
Exports also showed strength, with the combined goods and services growing by 12.2%. Merchandise exports rose by 17%, driven by semiconductors. Services exports also improved in 2Q with a 6.9% growth rate. Growth in telecommunications, computer and information services accelerated to 9.0%, while business services expanded by 5.8%, suggesting that the BPO sector remains resilient despite the challenges brought by AI.
Nevertheless, the broader macro environment remains challenging. Elevated oil prices arising from geopolitical tensions in the Middle East continue to pressure transportation and utility costs, while food inflation remains a major concern. The possibility of a severe El Niño event could further constrain agricultural production later this year. Adding to these risks, fertilizer prices have increased sharply. Even if oil prices moderate, inflation may remain elevated as a result.
The Bangko Sentral ng Pilipinas may need to raise its policy rate further in response to these risks. Recent policy actions suggest that the central bank is attempting to balance the need to bring inflation under control while avoiding a sharp slowdown in economic activity, resulting in a gradual pace of tightening in recent months. However, a larger rate increase later in the year cannot be ruled out, particularly if the impact of El Niño on food prices proves more severe than currently anticipated. Moreover, a potential rebound in economic growth in the second half of the year may allow BSP to place greater emphasis on anchoring inflation expectations.
Looking ahead, economic growth could improve in the second half of the year. Part of this improvement may stem from favorable base effects, particularly in public construction spending. Government construction activity started falling in 3Q 2025, creating a low base for comparison during the latter part of the year. Any stabilization in infrastructure implementation or improvement in budget execution could result in a notable improvement in the growth rate. PR
