Factory output expansion slowest in nearly 6 years

By Christine J. S. Castañeda
Senior Researcher

INDUSTRIAL PRODUCTION saw its biggest drop in almost six years in October, the Philippine Statistics Authority (PSA) reported yesterday.

In its latest Monthly Integrated Survey of Selected Industries (MISSI), the PSA said the volume of production index — a measure of factory output — contracted by 6.5% in October. The figure is lower than the revised 4.1% contraction recorded in September and a reversal of the 9.9% growth posted a year ago.

This was the worst turnout since December 2011 when factory output declined by 7.7%.

Year-to-date factory output growth averaged 3.6%, slower than the 10.1% growth logged in 2016’s January-October period.

Pulling down factory output were contractions in eight major sectors, namely: chemical products (-61%); tobacco products (-39.4%); textiles (-28.3%); footwear and wearing apparel (-27.5%); paper and paper products(-18.9%); petroleum products (-4.2%); transport equipment (-3%); and miscellaneous manufactures (-0.9%).

For Security Bank Corp. economist Angelo B. Taningco, the sharp drop in factory output in October “was induced by producer price inflation turning positive for the month, reflecting higher production costs.”

The Producer Price Index (PPI) for Manufacturing is a composite figure of producers’ prices of representative commodities included in the market basket.

For October, PSA data showed that the PPI for manufacturing inched up by 0.3% in October, a reversal of the declines of 0.6% and 4.8% posted in September and October 2016, respectively.

The last time the PPI grew was in September 2014 when it edged up 0.8%.

FACTORS
Union Bank of the Philippines (Union Bank) chief economist Ruben Carlo O. Asuncion blamed the contraction in manufacturing on “more expensive imported inputs due to the weak peso.”

In a press statement yesterday, Socioeconomic Planning Secretary Ernesto M. Pernia said that the continued decline in factory output at the onset of the fourth quarter reflected the “less optimistic business sentiment of firms in the manufacturing sector.”

“The Business Expectations Survey of the Bangko Sentral ng Pilipinas reported expectations of seasonal slack in demand for some products and stiffer competition due to business expansion of some firms as reasons for their less favorable outlook,” Mr. Pernia said.

The National Economic and Development Authority (NEDA), which Mr. Pernia heads as director general, noted in its statement that the production volume of major export-oriented goods continued to increase on the back of the “ongoing recovery of global trade,” citing the 7.4% increase in Asian trade volume in the January to June period.

NEDA also noted the growth in food manufacturing and in the production of construction-related goods.

“Production volume and value of manufactured food grew at a slower pace in the same month, while production volume of construction-related manufactures remained robust in October,” NEDA said in its statement.

NEDA attributed the increase in the production of construction-related goods to higher demand for non-residential buildings which was complemented by the government’s higher infrastructure spending and capital outlays which grew by 15.4% in the July-September period.

Average capacity utilization — the extent by which industry resources are being used in the production of goods — was estimated at 83.8%, with 11 of the 20 sectors registering capacity utilization rates of at least 80%.

Going forward, Security Bank’s Mr. Taningco said: “I expect factory output to recover in the last two months of year on the assumption that producer price inflation would ease.”

For Unionbank’s Mr. Asuncion: “Expect a subdued factory output, but not for long as the peso has stabilized and strengthened from November until this month.”