April factory output posts biggest drop in a decade

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INDUSTRIAL PRODUCTION dropped for the fifth straight month in April, marking the steepest fall in almost a decade, the Philippine Statistics Authority (PSA) reported on Tuesday.

Preliminary results of the PSA’s latest Monthly Integrated Survey of Selected Industries showed factory output, as measured by the Volume of Production Index (VoPI), contracting by 14% year-on-year in April versus the revised 9.5% decline in March and the 21% growth in April 2018.

The April reading marked the fifth straight month of decline and was the sector’s worst performance in almost a decade or since the 14.6% contraction in July 2009.

The five-month losing streak is also the longest since the 12-month slump between November 2008 and October 2009.

Year to date, factory output decline averaged 9.1% compared to the 14.5% growth average in 2018’s comparable four months.

The PSA reported 11 out of the 20 subsectors contracted in April, with seven recording two-digit declines: tobacco products (-29.2%), leather products (-25.5%), petroleum products (-24.3%), food manufacturing (-20.6%), furniture and fixtures (-19.6%), basic metals (-16.2%) and transport equipment (-11.8%).

In comparison, the Nikkei Philippines Manufacturing Purchasing Managers’ Index (PMI)dropped to 50.9 in April from 51.5 in March, marking the slowest improvement in nine months. A reading above 50 indicates improvement in business conditions from the preceding month.

While the VoPI and the PMI both seek to measure performance of the manufacturing sector, they differ mostly in terms of methodology used. The VoPI looks at the percentage change in production volumes in a particular period relative to a base period while the PMI indicates whether the proportion of respondents that reported an increase outweighs those that reported a decrease as regards indicators like output, new orders, inventory, employment, input and selling prices, as well as sentiment over the following 12 months.

Average capacity utilization — the extent by which industry resources are used in the production of goods — was estimated at 84.3%. Eleven of the 20 sectors registered capacity utilization rates of at least 80%.

Manufacturing has long been recognized as an essential sector for inclusive growth. Known for its multiplier and spillover effects, the sector is one of the biggest contributors to the Philippine gross domestic product (GDP). In the first quarter of 2019, manufacturing contributed 1.1 percentage points to the 5.6% GDP growth during the period.

The National Economic and Development Authority (NEDA) said in a statement that the government expects manufacturing to bounce back in the months ahead.

“[M]anufacturing output is expected to recover supported by improved domestic demand in the coming months. Easing inflationary pressures, accelerated government spending on infrastructure, and a more upbeat consumer outlook also provide additional support given expectations of additional income and availability of more jobs,” Socioeconomic Planning Secretary Ernesto M. Pernia, NEDA’s director-general, said in a statement.

Mr. Pernia also noted that in order to accelerate the growth of manufacturing, both “whole-of-government” and “whole-of-society” approaches are needed. The former refers to joint activities performed by the different government agencies in providing a common solution to a particular issue while the latter extends it to include stakeholders such as those in the private sector.

“The needs of the food processing sector should be addressed as it accounts for the largest share among all manufacturing sub-sectors. This points to the critical importance of agriculture which, besides being the source of food, is also the feeder sector to the food manufacturing sub-sector,” Mr. Pernia said.

Food manufacturing, which is the largest subsector in terms of contribution to factory output, has been registering declines for nine straight months or since August 2018. Of those nine months, six showed double-digit declines.

Ruben Carlo O. Asuncion, chief economist at Union Bank of the Philippines, Inc. (UnionBank), attributed the slowdown to the still-elevated levels of inflation and interest rates coming from the previous year.

“This consequently increases financing costs that directly impact firms’ production and expansion activities, and not to mention, the initial impact on domestic demand due to higher price levels,” Mr. Asuncion said in an e-mail.

“Of course, it should also be mentioned that external perception about global economic growth and its future prospects may have also been a factor in this marked slowdown in factory output, making companies rethink initial plans of additional production and other expansion activities.”

Last year saw inflation accelerating for nine straight months, peaking at a nine-year-high 6.7% in September and October before decelerating to six percent in November and 5.1% in December. This brought the full-year 2018 average to a decade-high 5.2% against the Bangko Sentral ng Pilipinas’ (BSP) 2-4% target range for 2018.

In its bid to quell inflation, the BSP hiked interest rates by a cumulative 175 basis points (bp) in five consecutive meetings in 2018. It was only in its May 9 meeting this year that the central bank took the first step in monetary policy normalization by partially dialing back benchmark rates by 25 bp. A week later, it announced a phased 200 bp cut in the reserve requirement ratios imposed on banks — the first of which took effect last Friday.

“[D]eclining growth of prices will help drive consumption and encourage consumers to resume buying and financial institutions to keep lending,” UnionBank’s Mr. Asuncion.

“The second half of 2019 may see an improvement of factory output.” — MAM