Photo from: ABS-CBN News

Introduction

During the past few years, the Philippine economy has witnessed  deceleration primarily due to a decline in business ​‍​‌‍​‍‌investments. According to the Philippine Statistics Authority (2025), gross domestic product (GDP) growth in the third quarter of 2025 hit 4%, marking the slowest pace of economic growth in the last four and a half years. According to the Bangko Sentral ng Pilipinas, lingering fiscal problems and lack of investor confidence will hinder the economy from achieving its full growth potential until 2026. Several consecutive months of disparity between actual and potential economic output have raised concerns about the potential effects on labor market growth, business confidence, and long-term economic progress.

Is the Philippine Economy operating below its potential?

This question emerges during the sluggish GDP growth, indicating that the economy is underperforming in its capacity. As GDP growth measures the expansion of economic activity, it also serves as a signal of reduced demand, underutilized labor, and unused capacity, reflecting the weak investment and consumption. 

However, GDP growth alone does not determine whether an economy is operating to its full capacity. Comparing actual output and potential output can show what is called an output gap. The difference between the two provides a clearer assessment of whether the economy is performing above or below its sustainable level.