Aug. 30 (Bloomberg) -- The Philippine economy expanded at the fastest pace in two decades as the government spent more on roads, bridges and schools and consumers bought mobile phones and new homes.

The $117 billion Southeast Asian economy grew 7.5 percent in the three months ended June 30 from a year earlier, from a revised 7.1 percent gain in the first quarter, President Gloria Arroyo said in Manila today. The pace exceeded the 6.5 percent median estimate of all 15 economists in a Bloomberg News survey.

Arroyo has said she wants to boost economic growth to as much as 6.7 percent this year from 5.5 percent last year to ease poverty in a nation with an average income of $1.66 a day. The first cut in borrowing costs since 2003 is fueling consumer spending.

``The expansion in the second quarter was a function of strong government spending and private investment and consumption which offset weak exports,'' said Edward Teather, an economist at UBS AG in Singapore. ``Growth momentum has accelerated in the last three quarters, raising the possibility that the Philippines growth has shifted up a gear.''

UBS raised its 2007 growth estimate to 7.1 percent from an earlier forecast of 5.9 percent. It also raised the estimate for next year to 6.5 percent from 6.1 percent.

Second-quarter growth was the strongest since the fourth quarter of 1989, according to data compiled by Bloomberg. The Philippine peso rose 0.3 percent to 46.675 per dollar at 1:56 p.m. in Manila and the benchmark stock index surged 3.5 percent to its highest in three weeks.

Interest Rates

``The combination of strong growth coupled with manageable inflation will allow us to maintain our neutral policy stance,'' central bank Governor Amando Tetangco said in a text message sent from his mobile phone today.

The central bank kept its benchmark interest rate unchanged at 6 percent on Aug. 23 after lowering borrowing costs in July for the first time since 2003 to spur growth. Inflation is close to a seven-year low.

``This is a strong indication that we are on the right track towards a sustainable and meaningful economic growth that is felt by the majority of our people,'' Finance Secretary Gary Teves said in a mobile-phone text message.

Consumer spending, which accounts for about 70 percent of the economy, increased 6 percent after a 5.9 percent gain in the first quarter, according to a report today from the National Statistical Coordination Board. Services expanded 8.4 percent, led by banks and other financial institutions.

Election Spending

Election-related spending also helped boost consumer spending, Economic Planning Secretary Augusto Santos said. The Southeast Asian nation had 48,967 candidates who ran for the Senate, House of Representatives and local government positions in the May 14 elections, according to the Commission on Elections Web site.

Government spending accelerated by 13.5 percent in the second quarter from a year earlier, after a 9.9 percent rise in the first three months of 2007.

The government plans to spend 1.18 trillion pesos ($25.3 billion) this year, 13.8 percent higher than what it spent in 2006 as it accelerates construction of roads, bridges, and schools.

The government can ``sustain'' infrastructure spending, Budget Secretary Rolando Andaya said today.

Capital spending rose 8.2 percent as companies bought more equipment to expand production. It rose 6.9 percent in the first three months of the year.

Outlook Revisions

``The economy has taken many by surprise and the market will probably revise its outlook as result of this,'' said Paul Joseph Garcia, who helps manage $1.8 billion as chief investment officer at ING Asset Management in Manila.

The pace of second-quarter growth may be the third-fastest among the six Southeast Asian economies tracked by Bloomberg after Singapore and Vietnam.

Thailand's GDP probably expanded 4.1 percent in the three months to June 30, according to economists' estimates. The government report is due Sept. 3. Malaysia's economy grew 5.7 percent, a government report showed yesterday.

Exports, which account for about two-fifths of Philippine gross domestic product, increased 4.2 percent, after expanding 9.9 percent in the previous quarter.

U.S. Exports

Weaker U.S. demand is hurting Asian export-dependent economies, which are almost twice as reliant on sales abroad as the rest of the world. Malaysia yesterday said shipments of manufactured products dropped in the second quarter.

Remittances rose 7.8 percent in the second quarter, slowing from a 14.1 percent pace in the previous three months. Growth in funds sent home by Filipinos abroad that's been driving consumer spending is slowing as fewer people find jobs overseas.

Agricultural production grew 3.9 percent in the second quarter, slowing from 4.1 percent. Industrial output rose 8 percent, quickening from the prior quarter's 6.3 percent pace. Services increased 8.4 percent.

To contact the reporters for this story: Karl Lester M. Yap in Manila at kyap5@bloomberg.net; Luzi Ann Javier in Manila at ljavier@bloomberg.net

Last Updated: August 30, 2007 02:02 EDT