Factory output falls for 9th straight month in August

By Jenina P. Ibañez

MANUFACTURING output declined for the ninth straight month in August, the government reported on Friday.

Preliminary results of the Philippine Statistics Authority’s (PSA) latest Monthly Integrated Survey of Selected Industries (MISSI) showed factory output — as measured by the volume of production index — contracting by 9.3% year on year in August versus July’s revised 6.1% contraction and the 3.1% increase in August 2018.

Manufacturing production growth rates have been dropping since December 2018.

Year to date, factory output decline averaged 8.6% compared to the 11.7% growth average in 2018’s comparable eight months.

The PSA reported seven out of the 20 subsectors contracted in August: petroleum products (-59%), furniture and fixtures (-43.4%), transport equipment (-19%), miscellaneous manufactures (-17.7%), electrical machinery (-11.1%), beverages (-8.4%), and textiles (-3.6%).

Food manufacturing once again went up, increasing by 7.2% in August after ending its eleven-month decline in July.

In comparison, the IHS Markit Philippines Manufacturing Purchasing Managers’ Index, which used a different set of parameters, bared a 51.9 reading in August, compared to July’s 52.1. A reading above 50 signals improvement in business conditions from the preceding month, while a score below that point indicates deterioration.

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

Rizal Commercial Banking Corp. (RCBC) economist Michael L. Ricafort said that the continued decline in manufacturing output is largely caused by global trade tensions.

“The latest year-on-year decline in manufacturing gauges may be largely brought about by the lingering/escalating US-China trade war that weighed on global economic growth/outlook that resulted to slower global trade and manufacturing gauges,” he said in an email response to questions.

He added that investors’ “wait-and-see” attitude in response to pending legislation on tax incentives also contributed to the decline.

“Uncertainties on the proposed rationalisation of fiscal incentives (though offset by the proposed reduction of corporate income tax from 30% to 20% over 10 years) may have caused some slowdown in both investments and production activities by both local and foreign investors while waiting for greater clarity and immediate implementation of the CITIRA bill before they pour in more investments and production, especially in the manufacturing sector,” he said.

The House of Representatives has already approved on third and final reading the Corporate Income Tax and Incentives Rationalization Act (CITIRA), fast-tracking the government’s plans to lower income taxes and slash the incentives of businesses.

ING Bank Manila NV senior economist Nicholas Antonio T. Mapa said that some growth in food manufacturing, the largest subcategory in terms of contribution to the country’s factory output, was not able to offset weaknesses in other major manufacturing contributors.

“Lower demand for petroleum products due to oil prices movements and general demand weakness due to global slowdown dragged on output, while electrical machinery and transport equipment pulled back on due to the regional tech slump exacerbated by the trade war,” Mr. Mapa said.

RCBC’s Mr. Ricafort added that the delay in the approval of the 2019 budget, along with the 45-day election ban on some infrastructure projects, may have also caused a slowdown in the construction and related industries.

He also noted that recent loan growth is relatively slow because manufacturers may have waited for interest rates to go down further. This caused slower capital formation and manufacturing production activities.

Moving forward, Mr. Ricafort sees more manufacturing investment in the coming months. He said that local long-term interest rates in early August 2019 could have bottomed out at their cheapest rate in two to three years.

He said that this “could make some businesses, consumers, government, and other institutions more aggressive in their borrowings/financing for new investments (capital formation), expansion projects, and other acquisitions/spending that could lead to more economic activities and faster growth especially in the manufacturing sector as well as in the broader economy in the coming months.”

According to ING Bank’s Mr. Mapa, growth in the manufacturing sector will depend on how it diversifies.

“Going forward, the sector must look to diversify away from reliance on food manufactures and look to other sectors to improve resilience to downturns and, well the weather,” he said.

“True reform will be needed to get manufacturing revived, and the ‘Build, Build, Build’ initiative will help improve efficiency and bolster the economy across the board from agriculture to manufacturing and services.”