Factory output decline persists

FACTORY OUTPUT in the country extended its declining streak to the 10^th straight month in September, the government reported on Tuesday.

Preliminary results of the Philippine Statistics Authority’s (PSA) latest Monthly Integrated Survey of Selected Industries showed factory output — as measured by the volume of production index — contracting by three percent year on year in September versus the revised 9.7% decline in August and the 1.3% growth in September 2018. Factory production has been falling since December last year.

Factory output decline averaged eight percent so far this year compared to the 10.6% growth average in 2018’s comparable nine months.

The Nikkei Philippines Manufacturing Purchasing Managers’ Index (PMI), which uses a different set of variables, decreased that month to 51.8 from August’s 51.9 and last year’s 52. 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 84.4% with 13 of the 20 sectors registering capacity utilization rates of at least 80%.

The report noted production of eight out of the 20 major industry groups fell, namely: electrical machinery (-10.4%); petroleum products (-17.3%); transport equipment (-8.3%); miscellaneous manufactures (-13.5%); furniture and fixtures (-30.1%); textiles (-3.5%); non-metallic mineral products (-1.8%); and leather products (-22.3%).

In a statement, the National Economic and Development Authority (NEDA) said that while the manufacturing index dropped in September, some subsectors “have shown improvements.”

“[W]e have observed improvements in various subsectors which can be attributed to the upcoming holiday season alongside lower inflation, stable exchange rate, and lower interest rate,” NEDA Officer-in-Charge and Undersecretary for Regional Development Adoracion M. Navarro was quoted in the NEDA statement as saying.

Ms. Navarro cited growth in beverages (13.9%); tobacco products (48.6%); basic metals (16.9%); fabricated metal products (33.3%); wood and wood products (22.7%); machinery except electrical (13.1%); chemical products (5.1%); paper and paper products (13.2%); printing (79.9%); and rubber and plastic products (6.6%).

Other segments that also posted growth were footwear and wearing apparel (8.1%) and food manufacturing (2.8%).

Economists interviewed attributed manufacturing’s weakness to both domestic and external factors.

“Manufacturing production growth rates in aggregate continue to drop since December 2018 as manufacturers faced several hurdles, chief of which could be variable power and water rates, these being essential inputs to manufacturing activity,” said Security Bank Corp. Chief Economist Robert Dan J. Roces in an e-mail.

“Moreover, some export-oriented manufacturers have been affected by external headwinds particularly from a subdued global outlook brought on by the US-China trade war,” he added.

For UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion, manufacturing’s weakness can be ascribed to weak global trade brought mainly by the protracted US-China trade war that has been raging for nearly 16 months now.

“This manufacturing drop may have been due to the trade problem… because of the composition of the particular sub-sectors that are largely and majorly export-oriented. It should be noted that exports this year have been lackluster due primarily to the perception about the prospects of world trade moving forward,” Mr. Asuncion said in a separate e-mail.

According to PSA data, exports of manufactured goods accounted for 83.2% of the country’s total merchandise exports as of August. Manufactured goods declined by 0.2% year on year to $38.84 billion in the first eight months of 2019, buoyed mostly by a 1.9% growth in chief goods export electronic products. Excluding export sales from electronic products, merchandise sales of manufactured goods during that period declined by 4.3% to $12.79 billion.

Moving forward, Mr. Asuncion sees manufacturing production to improve in the coming months given positive developments in the trade spat between the two economic superpowers.

“With the US and China said to be progressing with the first phase of their major trade deal after months of tariff escalation, the general outlook on global trade seems to be more stable. This means that perceptions and expectations are better than when no trade agreement was in sight,” Mr. Asuncion said.

“Since September, trade talks between the two biggest economies of the world have gone through much progress and more positives particularly those from the negotiating table have been developing. The positives may bode well for a reversal of the manufacturing growth rate decline towards the end of 2019 and early 2020,” he added.

A Reuters report last Thursday said that despite the abrupt cancellation of the Asia-Pacific Economic Cooperation Summit in Chile that could have led to the US and China signing a much-needed trade deal to de-escalate the trade war, Chinese officials continue to express optimism that Beijing and Washington could still sign a trade deal next month. For Security Bank’s Mr. Roces, the government’s catch-up spending amid easing inflation levels “should boost manufacturing activity” early in the fourth quarter due to the expected higher demand.

“The lower interest rates on the back of policy cuts by the BSP (Bangko Sentral ng Pilipinas) will also help with capital expansion and the extension of the validity for 2019 infrastructure projects to next year should regain higher capacity utilization as well given that more than half of establishments are operation below the national average capacity,” Mr. Roces said. — Edwin C. Aruta