Capital Economics on Thursday downgraded its 2021 Philippine economic growth forecast, noting that the country will likely experience the slowest recovery in Southeast Asia.

In a report, the London-based consultancy firm said the country’s gross domestic product (GDP) is projected to grow by 7.5 percent, down from the earlier 9.5 percent forecast.

“A failure to contain the virus and lackluster fiscal support means that the Philippines will experience the slowest recovery in the region,” Capital Economics said.

“The economic recovery slowed significantly in Q1 (first quarter) and is set to go into reverse this quarter. A surge in new Covid-19 (coronavirus disease 2019) cases has forced the government to impose stringent containment measures in the capital and outlying regions. Mobility data point to a sharp fall in activity,” it added.

The latest forecast falls at the upper end of the government’s 6.5- to 7.5-percent projection. It would also be a turnaround from the 9.6-percent contraction recorded last year.

It was also lower than the 12-percent growth forecast for Brunei, 9 percent for Laos, and 10 percent projection for Vietnam.

Capital Economics said a successful rollout of vaccines for Covid-19 will be “game changer.”

“But progress so far has been disappointing – just 1 percent of the population have been inoculated. The slow rollout raises doubts about the government’s ability to meet its targeting of inoculating 60 percent of the population this year,” it said.

The report said the latest wave of infections will also lead to increased lasting damage such as business insolvencies, weaker household balance sheets, and high unemployment.

“Lackluster fiscal support will make these economic scars worse. Overall, we expect GDP (gross domestic product) to still be around 7-percent smaller than its pre-crisis trend at the end of 2023 – by far the largest gap in the region,” it said.

Capital Economics projects the economy to grow by 12 percent in 2022 and 8.5 percent in 2023.

Inflation, meanwhile, is seen to settle at 4 percent this year, 2.2 percent in 2022, and 3.0 percent in 2023.

“Policy rates have been on hold since November. A further rise in inflation in the coming months driven by higher fuel prices mean further rate cuts are unlikely in the near term. But with the increase in inflation likely to be temporary and the economic outlook increasingly perilous, we still expect a couple more cuts later in 2021,” said Capital Economics.