June factory growth buoys Q2 reading

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By Elijah Joseph C. Tubayan, Reporter

IMPROVEMENT in manufacturing activity eased in June from the preceding month as increases in output and new orders ebbed, according to the latest survey IHS Markit conducted for Nikkei, Inc. that nevertheless showed last month’s “solid” growth pushing the second quarter’s average Purchasing Managers’ Index reading higher than that of January-March.

The Nikkei Philippines Purchasing Managers’ Index (PMI) slid to 52.9 in June from 53.7 in May, placing the Philippines third among select Association of Southeast Asian Nations (ASEAN) members from second in the preceding month though still above the region’s 51.0 PMI that itself was down from May’s 51.4.

A PMI reading above 50 suggests improvement in business conditions compared to the previous month, while a score below that signals deterioration. The manufacturing PMI is composed of five sub-indices, with new orders weighing 30%, followed by output (25%), employment (20%), suppliers’ delivery times (15%) and stocks of purchases (10%).

The report cited June’s slower increases in output and new orders, steady employment as well as elevated inflation and business confidence.

“Manufacturing conditions in the Philippines improved further at the end of the second quarter, buoyed by increases in both output and new orders,” the report read, noting that “[h]igher input inventories and stretched supply chains also boosted the headline PMI.”

“However, greater manufacturing activity failed to test firms’ operating capacity as reflected by lower backlogs which, in turn, weighed on hiring. Employment levels were broadly steady,” he added.

“Inflation meanwhile remained elevated, as did business confidence.”

Still, “[w]ith June data, the average reading for the second quarter was noticeably higher than the opening quarter of 2018.”

The report quoted Bernard Aw, IHS Markit principal economist, as saying that June survey results showed “the Philippines manufacturing economy continued to recover from the implementation of… tax reforms at the start of the year” with “improving demand conditions at the end of the second quarter.”

At the same time, the report cited “sharp input cost inflation” on a weaker peso, increased taxes, supply shortages and higher prices of fuel that was nevertheless slowest in five months.

“As a result, factory gate price hikes remained sharp, which could feed through to consumer inflation in the coming months,” Mr. Aw said, noting that headline inflation pierced the government’s 2-4% full-year target for the third straight month in May at a six-and-a-half year high 4.6%.

June inflation — scheduled to be reported this Thursday — is expected to have clocked slightly faster at about 4.7%, according to a median of a BusinessWorld poll of 12 economists, within the Bangko Sentral ng Pilipinas’ (BSP) own 4.3-5.1% estimate.

Projected faster inflation, Mr. Aw added, would add to “expectations of further rate hikes” after BSP’s 25 basis-point increases in its Monetary Board’s May 10 and June 20 policy meetings.

Angelo B. Taningco, economist at Security Bank Corp. said that firms continued to expand as they weathered price effects of tax reform and high global oil prices.

“Demand for manufactured items was deemed robust in June, which I believe may have been a time for further business expansion,” Mr. Taningco said in an e-mail yesterday.

“I think the strong business investment and government spending were both supported by TRAIN that in turn allowed manufacturers to sustain their healthy production despite rising costs induced by elevated global oil prices and peso depreciation,” he added, referring to Republic Act No. 10963 or the Tax Reform for Acceleration and Inclusion that slashed personal income tax rates to prod households to spend more and increased or added taxes on several goods and services when the law took effect on Jan. 1.

Guian Angelo S. Dumalagan, market economist at Land Bank of the Philippines, noted separately that “[i]n the first few months of the year, some firms were still testing the waters, adjusting their product prices gradually to prevent negative demand shocks.”

“When firms complete the process of passing input price inflation to consumers, we could probably see some improvement in firm profitability,” Mr. Dumalagan added.

“While this strategy could reduce the negative impact of rising prices, it could not totally eliminate all repercussions. In particular, this strategy could temper domestic demand.”

Within the Association of Southeast Asian Nations (ASEAN), Vietnam firmed its lead with a 55.7 PMI that was faster than its May reading, while Singapore dislodged the Philippines from second spot.

“The ASEAN manufacturing sector had its best quarter in four years,” Mr. Aw said in a regional report.

“However, both output and new orders grew at slower rates, while export demand weakened,” he noted.

“More concerning was new orders have now grown at a slower rate than output for three consecutive months, suggesting that production capacity could start to be reined-in in coming months,” he added.

“Furthermore, business confidence relating to future output fell to the lowest in the survey history.”