By Elijah Joseph C. Tubayan

FACTORY activity in the country improved in April as output and new orders from here and abroad picked up the pace even as inflation remains elevated, according to an IHS Markit survey conducted for Nikkei.
The Nikkei Philippines Manufacturing Purchasing Managers’ Index (PMI) rose to 52.7 in April from 51.5 in March, the highest level for the year.
“The recent upturn of the Philippines manufacturing sector was lifted by strengthening demand conditions at the start of the second quarter. Order book growth accelerated noticeably to a four-month high, which was accompanied by faster output expansion,” the report read.
“As a result, Filipino goods producers raised employment levels and scaled up purchasing activity. Inventories also increased, though supply chains came under pressure. Optimism remained high, as did inflationary pressures,” it added.
The report noted an improvement in client demand, with new orders growing at the fastest rate since December 2017. New orders from abroad was the highest in 16 months. As a result, output volumes rose to its fastest in four months.
This led to companies hiring more workers, yielding a net job creation after two months of job cuts.
The report, however, said that overall input costs rose due to higher prices paid for fuel, industrial metal, sugar, and paper, as well as the weaker exchange rate and the effect of the new excise taxes.
Republic Act No. 10963 — or the Tax Reform for Acceleration and Inclusion (TRAIN) — took effect on Jan. 1, which reduced personal income, estate and donors tax rates, but removed some value-added tax exemptions; hiked excise tax rates for automobiles, minerals, tobacco and fuel; as well as imposed new excise levies on sugar-sweetened beverages and cosmetic procedures.
“As a consequence, the rate of inflation remained sharp and well above its historical average, though slower than the survey-record pace in March. In response, firms passed on higher costs to their clients by again raising selling prices. The pace of charge inflation was the second-fastest in the survey history,” the report read.
A PMI reading above 50 suggests improvement in business conditions compared to the previous month, while a score below that signals deterioration.
The manufacturing PMI is composed of five sub-indices, with new orders accounting for 30%, followed by output (25%), employment (20%), suppliers’ delivery times (15%) and stocks of purchases (10%).
Commenting on the report, IHS Principal Economist Bernard Aw said first quarter manufacturing expansion was affected by the new excise taxes, but the April data “suggests that demand has since adjusted to these higher levies.”
“However, higher excise taxes continued to be felt through the pricing mechanism. While easing from the survey-record rate in March, input cost inflation remained elevated, not least because of a weak exchange rate, supply shortages and suppliers’ price hikes. In most cases, firms were able to pass on some of the higher costs to their customers, but the pressure on profit margins remains marked,” Mr. Aw said.
“With companies’ optimism remaining high, despite the dip in April, it looks likely that growth may well accelerate further in coming months,” he added.
Michael L. Ricafort, an economist at the Rizal Commercial Banking Corp., said that the rise in manufacturing activity is an effect of the higher foreign direct investments (FDIs) that stood at $10 billion in end-2017.
“The latest pick up in Philippine manufacturing activity may reflect improvements in the Philippine economic fundamentals, especially in terms of record foreign direct investments… some of the FDIs in the manufacturing sector have already become operational/online,” Mr. Ricafort said in an e-mail yesterday.
Mr. Ricafort noted that the reduction of individual tax rates “has increased the incomes and purchasing/spending power of consumers,” boosting demand for manufactured goods.
Union Bank of the Philippines Chief Economist Ruben Carlo O. Asuncion, meanwhile, said that “this is also the validation of the business optimism prevalent since the last part of the first quarter.”
“Although the new taxes somehow dampened production in the first quarter, it seems that a lot of the producers have adjusted fairly, and demand has also somehow beginning to adjust to the new fiscal structure,” he said.
Mr. Asuncion said that strong consumer demand and the upbeat manufacturing sector likely drove gross domestic product (GDP) growth in the second quarter to 7.2%, higher than his 6.9% estimate for the first three months.