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Factory output growth eases but remains robust in May

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By Mark T. Amoguis, Researcher

THE COUNTRY’S factory production continued to expand by double-digit pace for the fifth straight month in May, though at a slower clip than in the preceding month, the Philippine Statistics Authority (PSA) reported on Thursday.

Preliminary results of the PSA’s Monthly Integrated Survey of Selected Industries showed that factory output — as measured by volume of production — went up by 19.8% annually in May.

This was a reversal from the revised 0.6% decline in the same month last year albeit slower than the also-revised 29% uptick logged in April.

The May figure marked the fifth straight month of double-digit growth. On the average, factory output volume has grown 21% so far this year, faster than the 7.3% recorded in 2017’s comparable five months.

The latest result roughly jibed with IHS Markit’s seasonally adjusted Nikkei Philippines Manufacturing Purchasing Managers’ Index (PMI), which bared a score of 53.7 in May from 52.7 in April. A PMI reading above 50 suggests improvement in business conditions, while a score below signals deterioration.

Average capacity utilization, which is the extent by which industry resources are used in the production of goods, was estimated at 84.2% with 12 of the 20 sectors registering capacity utilization rates of at least 80%.

The National Economic and Development Authority (NEDA), in a statement, attributed May’s production growth to food manufacturing, petroleum products, construction-related manufactures, export-oriented products and transport equipment.

Driving growth in manufacturing were increases in the production of printing (117.8%), petroleum products (33.3%), food manufacturing (32.5%), miscellaneous manufactures (19.2%), textiles (18.8%), electrical machinery (17.4%), as well as rubber and plastic products (12.6%).

Michael L. Ricafort, economist at the Rizal Commercial Banking Corp. (RCBC), said May’s volume of production growth “may be partly due to the low-base/denominator effects.”

“The pickup in manufacturing may be also attributed to the increase in household incomes and spending power since January 2018 when individual income tax rates were reduced under the TRAIN (Tax Reform for Acceleration and Inclusion) Law and resulted to higher purchasing power on consumers,” he said.

He also cited the real estate and construction boom, record-high foreign direct investments in recent years, and uptake of electronic exports growth as factors that fueled May’s production surge.

“The boom in both real estate and construction, as well as the increase in government spending especially on infrastructure… may have benefitted allied manufacturing industries that are related to real estate and construction,” he said.

Angelo B. Taningco, economist at Security Bank Corp., said that the double-digit expansion seen by manufacturing “may have been motivated by strong domestic demand for manufactured items amid rising product prices.”

OUTLOOK
“Higher demand due to school enrollment and harvest periods, expansion of businesses and new product lines, and ongoing rollout of public infrastructure projects are anticipated to further increase manufacturing production,” Socioeconomic Planning Secretary Ernesto M. Pernia was quoted in NEDA’s statement as saying.

Meanwhile, analysts said that the continued growth of the manufacturing sector will further contribute to the economy’s growth story in the second quarter.

“Faster growth in manufacturing/factory production would continue to be a major contributor to the pickup in the Philippine economic growth in Q2 2018, similar to the increased contribution of the broader industry sector to Philippine economic growth as seen in the recent quarters,” RCBC’s Mr. Ricafort said.

Security Bank’s Mr. Taningco agreed: “Q2 GDP (gross domestic product) will benefit from the strong performance of the manufacturing sector, which is a key growth contributor to national output.”

Historically, industry sector contributes around 35% to the country’s GDP, while its subsector, manufacturing, accounts for about 25%.

Economic managers have said they expect GDP growth to clock in at about seven percent when the PSA reports official data on Aug. 9, compared to the first quarter’s 6.8% and the government’s 7-8% full-year 2018 target.

Analysts said that the manufacturing sector’s expansion will be sustained in the coming months amid strong domestic investment.

Security Bank’s Mr. Taningco believes that “manufacturing will likely sustain its double-digit output growth for the rest of the year.”

“This will be on the back of buoyant domestic investment that spurs demand for manufactured items.”

RCBC’s Mr. Ricafort concurred, but warned of risks that could dampen the sector’s growth such as increasing prices of oil and other global commodities and the trade spat between the United States on the one hand and China, the European Union and the US’ other western partners on the other “that could slow down global trade and overall global economic growth.”