By Carmina A. V. Olano
INDUSTRIAL PRODUCTION in the country marked December with double-digit drop that was the worst reading in 13 months, the Philippine Statistics Authority (PSA) reported on Tuesday.
In its latest Monthly Integrated Survey of Selected Industries, the PSA said the volume of production index — a measure of factory output — contracted by 10.07% in December, a reversal from the revised 1.63% growth in November. This was also bigger than the 6.1% decline posted in December 2017 as well as the sector’s worst performance since November 2017’s -10.1%.
December brought factory output growth to average 7.2% in full-year 2018, still better than the 0.5% slump recorded in 2017.
In comparison, the Nikkei Philippines Purchasing Managers’ Index (PMI) — which tracks factory activity in terms of new orders, output, employment, suppliers’ delivery time and inventory — saw the country’s reading ease to 53.2 in December from 54.2 in November. This was the slowest domestic manufacturing growth in four months or since the 52 recorded in September. A PMI reading above 50 signals improvement in business conditions from the preceding month, while a score below that point indicates deterioration.
“Ten out of 20 industry group registered annual declines, with two-digit decreases noted in the following major industry group: printing (-79.4%), chemical products (-28.9%), tobacco products (-22.1%), food manufacturing (-17.8%), basic metals (-16.7%) and machinery except electrical (-12.6%),” PSA said in its report.
Average capacity utilization — the extent by which industry resources are used in the production of goods — was estimated at 84.3% in December. Eleven of the 20 sectors registered capacity utilization rates of at least 80%.
“We have expected this decline because the holiday season is over. These figures could also indicate a likely tepid growth consistent with the latest Business and Consumer Expectations Survey of the Bangko Sentral ng Pilipinas,” Socioeconomic Planning Secretary Ernesto M. Pernia said in a statement of the National Economic and Development Authority, which he heads as director-general.
Nonetheless, Mr. Pernia noted upsides to manufacturing such as the decline in rice prices, downward adjustment of electricity rates and the slight appreciation of the peso, which may help improve consumer outlook and prop up demand.
“Moreover, election-related spending is projected to benefit manufacturing subsectors such as food, beverage, tobacco and printing and paper products,” Mr. Pernia said.
On the other hand, he warned that price hikes of domestic oil and the upcoming El Niño “could translate to price pass-throughs in manufacturing.”
For University of Asia and the Pacific (UA&P) economist Cid L. Terosa, the decline in factory output in December is “concerning,” noting that the sector has been touted as one of the economy’s growth drivers. “Also, manufacturing has consistently pulled the economy upwards up until inflationary pressures and external events dragged manufacturing output downwards,” he said.
For Michael L. Ricafort, economist at the Rizal Commercial Banking Corp. (RCBC), December’s factory output contraction echoed manufacturing performance of the US, China and other major economies. “[T]his may also be attributed to slower demand for Philippine exports (especially to China) amid the lingering US-China trade war that slowed down global trade and global economic growth,” he said.
Another major factor, Mr. Ricafort said, is the sharp rise of domestic interest rates as it may have reduced borrowing by manufacturers and “effectively reduced” the sector’s activities.
“Some manufacturers may be waiting for input costs and borrowing costs to go down further after inflation reached the peak of 6.7% in October 2018 to further save on costs as prices continued to ease… while also using up existing inventories obtained earlier in 2018…” Mr. Ricafort explained.
“Some uncertainties over the proposed rationalization of fiscal incentives… caused some manufacturers, especially foreign investors, [to be] on a wait-and-see attitude on new investments and expansion projects on their local manufacturing activities…”
Moving forward, RCBC’s Mr. Ricafort said that the easing inflation and expectations of lower interest rates “could result in some pick up” in manufacturing activities in the coming months.
“[L]ower inflation and interest rates fundamentally increase the incomes and spending power of consumers and businesses and may also support the pick-up in manufacturing growth,” he said.
For UA&P’s Mr. Terosa: “Factory output for the first half of the year will grow…”
“It won’t be as vigorous as last year, but the second half of the year could be better. The [upcoming mid-term] elections, further implementation of infrastructure projects, the upcoming South East Asian games in November, and a more stable inflation environment could trigger positive effects across many industries.”