Factory activity slide eases in May

FACTORY activity remained in contraction for a third straight month in May, but at slower pace than April’s crash, as the lockdown continued to disrupt manufacturing firms’ operations.

IHS Markit on Monday said the Philippines manufacturing Purchasing Managers’ Index (PMI) improved to 40.1 last month from April’s record low of 31.6, as “easing of measures in some regions helped the rate of contraction in production soften from April.”

“Despite the improvement, the reading still pointed to a sharp deterioration in operating conditions across the manufacturing sector, the third in as many months,” IHS Markit said in a statement.

A PMI reading below 50 signals deterioration in operating conditions compared to the preceding month, while a reading above 50 denotes improvement.

The headline PMI measures manufacturing conditions through the weighted average of five indices: new orders (30%), output (25%), employment (20%), suppliers’ delivery times (15%) and stocks of purchases (10%).

Manufacturing conditions in countries across the region all rebounded in May from the record lows recorded in April, but still remained below 50. Malaysia reported a marked improvement to 45.6 last month from 29 in April, followed by Vietnam’s 42.7, Thailand’s 41.6 and Myanmar’s 38.9.

As of press time, data for Indonesia and Singapore are not yet available.

IHS Markit attributed the muted production levels in the Philippines to lockdown measures that continued through May in some parts of the country, including Metro Manila and Calabarzon (Cavite, Laguna, Batangas, Rizal, and Quezon). Other provinces shifted to a more relaxed quarantine, which allowed more businesses to reopen.

“Yet conditions have still not recovered, with restrictions in the capital and other cities broadly the same since April, in part leading to another sharp fall in new order volumes,” David Owen, an economist at IHS Markit, was quoted as saying.

“Only the lifting of measures in rural areas helped to slow the decline. Employment continued to drop amid excess capacity, further hampering demand conditions,” he added.

IHS Markit said capacity of factories was still “lower than normal” in May as companies implemented physical distancing measures. Companies were also reluctant to increase output as new orders remained weak.

“Demand for manufactured goods continued to fall during the month, with the latest decrease softer than that seen in April but still the second-sharpest since the series began in January 2016,” it said.

Firms reported weaker sales here and abroad due to the lockdown, forcing companies to cut back buying activities and reduce inventories.

“That said, the drop in inventories of raw materials and semi-finished items eased as some manufacturers raised holdings in anticipation of a nationwide lifting of lockdown measures,” IHS Markit said.

With travel bans and checkpoints around the country, deliveries of materials continue to be delayed with lead times rising “substantially and for the tenth month running.”

Employment fell for the fourth time in five months in May, as companies operated with only skeletal workforce.

“The fall in new orders meant that capacity to complete backlogs remained sufficient, although outstanding work dropped only marginally and at the softest pace in over four years,” it added.

IHS Markit noted the manufacturers reported a rise in input costs in May due to more expensive raw materials, although lower fuel prices cushioned the impact.

“Price pressures began to inflate in May after marked decreases during March and April. Raw material prices rose slightly as reductions in global supply started to outweigh weaker demand and lead to difficulties in acquiring inputs,” Mr. Owen said. “Output prices also increased, but firms tried to keep charge inflation low, hoping this would encourage an improvement in sales once demand conditions have returned to normal.”

IHS Markit said it saw improvement on the “degree of sentiment regarding output in a year’s time” as firms were encouraged on partial lifting of lockdown and cases of coronavirus disease 2019 (COVID-19) “being kept under control.”

“Firms hoped that the introduction of new products would also drive activity higher,” it said.

According to think tank Capital Economics, the PMI readings across Emerging Asia, which includes the Philippines, may “not accurately reflect the change in industry conditions last month, but they are still indicative of the fact that output remains very depressed.”

Meanwhile, Capital Economics said in a note that conditions in the manufacturing sector “worsened from April to May” as readings were below 50.

“While PMI readings are unusually hard to interpret this month, the bigger picture remains the same — the region’s manufacturing sector is in a deep recession. Industry is likely to have seen an initial jump from the easing of lockdown restrictions. And things are likely to continue improving very gradually over the coming months as external demand recovers,” the think tank’s economist Alex Holmes said.

ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said the improvement in factory activity in May is still a “welcome sign” that output and new orders rebounded from the low April levels, which could signal a “start of the recovery and one step towards expansion.”

“With some parts of the country allowed to restart limited manufacturing in mid-May, output improved from April’s lows where almost 70% of the economy was shuttered as we sheltered in place. New orders also picked up, offering us clear indications that June activity will post a second month of improvement as lockdown measures were eased in NCR, hopefully in expansion territory as we look to salvage the year,” Mr. Mapa said via e-mail.

Capital Economics said output will likely still settle below normal levels “for many months to come” as demand both locally and globally will remain “very depressed.” — Beatrice M. Laforga