The International Monetary Fund (IMF) said on Wednesday it expects the Philippine economy to shrink 1 percent this year, compared to a previous forecast of flat growth, before returning to growth of 2.25 percent in 2010.

The IMF also said it expects remittances of Filipinos abroad, a key pillar of the economy, to fall 4 percent in 2009, better than a previous estimate of a 7.5 percent drop made in April.

Philippine inflation is estimated to average 3.25 percent this year and 4.25 percent in 2010, the IMF said after its team concluded a review of the Southeast Asian economy.

The country's budget deficit may widen to as high as 3.5 percent of GDP as the government lifts spending but the IMF said that would be acceptable to investors.