By Elijah Joseph C. Tubayan
PHILIPPINE manufacturing activity grew at a slower pace as the second semester began — marking the weakest reading in five months — amid softer demand, according to the latest survey IHS Markit conducted for Nikkei, Inc.
The seasonally adjusted Nikkei Philippines Manufacturing Purchasing Managers’ Index (PMI) slid for the second consecutive month to 50.9 in July from 52.9 logged in June, reflecting “marginal improvement in the health of the sector.”
The country rose to second place from third in June among the seven Association of Southeast Asian Nations (ASEAN) member economies covered, behind Vietnam’s “solid” 54.9 though still above the ASEAN average of 50.4.
The PMI is a composite index with new orders having the biggest weight among components at 30%, followed by output (25%), employment (20%), suppliers’ delivery times (15%) and stock of items purchased (10%). The 50 mark separates readings above it that reflect expansion from those below it that denote deterioration of business conditions.
“The Philippines manufacturing economy expanded further at the start of the second half of 2018, but at a weaker pace. Growth in both output and new orders slowed noticeably in July, accompanied by a milder accumulation in input stocks,” the report read, explaining that “[t]here were signs of softening demand at the start of the third quarter.”
The report noted that new business increased at its weakest pace in survey history despite export growth hitting a 19-month high, and cited input shortages amid high prices of raw materials.
“Slower sales led firms to scale back their production volumes. Output growth reached a six-month low. That said, there was anecdotal evidence that input shortages disrupted production activity,” the report read.
“Inflationary pressures in the sector remained marked. Higher prices for raw materials… a weaker peso and effects of the TRAIN regulations all contributed to input cost inflation, which remained well above that seen in recent years,” it added, referring to the Tax Reform for Acceleration and Inclusion law. “Greater cost burdens led firms to raise selling prices further in July.”
The latest PMI reading led IHS Markit Principal Economist Bernard Aw to say that “[s]lowing demand presents a worrying development and raises questions whether the recovery from the rollout of new excise taxes at the start of this year is losing steam.”
“One area where the TRAIN laws are still felt strongly is prices. However, external factors are also driving inflation. Survey evidence pointed to higher oil prices and a weaker peso. Input cost inflation remained marked in the manufacturing sector in July which, in turn, led to further increases in selling prices.”
Mr. Aw also noted that lower personal income taxes under TRAIN may do only so much to fuel overall household spending.
“While higher discretionary income may encourage more consumption of manufactured products, the boost will be limited to specific sub-sectors, such as food and beverages. Other key manufacturing sub-sectors such as electronics and electrical as well as chemicals may not benefit as much — or even at all,” he said in an e-mailed reply to queries.
The Bangko Sentral ng Pilipinas gave a 5.1-5.8% estimate for July inflation, compared to the preceding month’s 5.2% pace.
Mr. Aw noted the rise in selling prices “remained far weaker than that of costs, suggesting pressure on profit margins.”
Two other economists said that inflation played a significant role in the slowdown of manufacturing growth, estimating that the overall rise in prices of widely used goods likely picked up to 5.5% in July from June’s 5.2%.
“With the steady acceleration of consumer prices, it is not surprising to see some softening in both consumer demand and manufacturing output. In fact, this trend of slower demand was already evident in the first-quarter GDP (gross domestic product) growth report of the Philippines,” said Land Bank of the Philippines market economist Guian Angelo S. Dumalagan, noting that household spending had then eased.
“If the average inflation of 3.8% in the first quarter was already enough to temper consumer demand, it would be reasonable to expect demand growth to remain short of its full potential given the above-5% inflation in June and July.”
For Ruben Carlo O. Asuncion, chief economist of Union Bank of the Philippines, “Inflation and the weak peso… have been a drag to manufacturing lately.”
“Inflation because domestic input costs go higher, while weak peso makes imported inputs become more expensive; although, the impact of higher government spending may have more than offset these economic growth holdbacks,” he said.