Factory business growth slows in Dec.

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FACTORY ACTIVITY in the Philippines improved in December at the slowest pace in three months on milder output and order growth, though overall input cost hike “eased noticeably,” according to the latest survey IHS Markit conducted for Nikkei, Inc.

Vietnam continued to outperform the Philippines to lead the seven covered Association of Southeast Asian Nations (ASEAN) members for the second straight month.

The Nikkei Philippines Manufacturing Purchasing Managers’ Index (PMI) stood at 53.2 in December compared to 54.2 in November and 54 in October, still “signalling a solid improvement in the health of the sector.”

The report noted that the average for the three-months to December was the strongest for 2018.

The Philippines’ reading trailed Vietnam’s 53.8 but was still above ASEAN’s 50.3 PMI that similarly eased from 50.4 in November.

A PMI reading above 50 indicates improvement in business conditions from the preceding month, while a score below that point signals deterioration. The manufacturing PMI consists of five sub-indices, with new orders having the heaviest weight at 30%, followed by output with 25%, employment with 20%, suppliers’ delivery times with 15% and stocks of purchases with 10%.

The Philippine report said that demand “remained solid” — particularly on the domestic front — in December even as it moderated to a three-month low and came from November’s one-year peak.

Production moderated for the first time in four months but was above the year-to-date average.

“While inflows of new orders rose at a slower pace from November’s 12-month high, it remained robust,” the report read.

“Survey data suggested that domestic markets played a primary role in driving demand amid soft international sales. New export orders declined for the fourth month running in December; however, the pace of contraction was marginal overall.”

Growing order volume led local manufacturers to employ more workers, recording the strongest increase in five months, “albeit modest overall.”

However, growth in the purchase of pre-production stocks slowed in December at the weakest pace in three months.

Port congestion continued to cause shipment delays.

The report also noted that local manufacturers raised output prices “modestly” in December, with input price inflation at its weakest in 28 months. It cited as inflationary factors the high costs of raw materials, a stronger dollar versus the peso, and higher taxes on some goods imposed in 2018 under Republic Act No. 10963, or the Tax Reform for Acceleration and Inclusion Act (TRAIN).

“Finally, business confidence about future output remained elevated in December, although the Future Output Index dipped to the lowest since July. Reasons for optimism included higher sales projections, new products, plans to expand operating capacity, and 2019 general elections,” the report read.

“The final survey of 2018 confirmed a strong end to the year for Filipino manufacturers. Despite dipping from November, output and new orders growth remained solid, while feeding a stronger increase to job numbers,” IHS Markit economist David Owen was quoted as saying.

“Also encouraging was a notable waning in input cost inflation to the weakest seen in over two years. Likely helped by the fall in oil prices, firms also reported an easing of recent cost pressures such as the exchange rate and the TRAIN law. This in turn saw firms raising factory gate prices modestly, offering a calmer and confident outlook for the sector in 2019,” he added.

Sought for comment, two economists said slowing remittances from Filipinos abroad — which in turn fuel household spending that drive overall economic expansion — as well as still-elevated inflation that made consumers think twice about spending were to blame for the slowdown in factory business expansion.

Sun Life Financial economist Patrick M. Ella said in an e-mail on Wednesday: “I think we have to adjust expectations as I think we are clearly on a slowing trend for remittances”.

“As for cost inflation on the production side, the producers price index has been in negative y-o-y for some time but has gone slightly positive a few months back then… has turned back negative. We should expect this to remain low as I think inputs like crude will remain cheap in the medium term.”

Ruben Carlo O. Asuncion, chief economist at the Union Bank of the Philippines, Inc., said in an e-mail that elevated inflation continues to weigh on demand and, in turn, cap growth of factory activity.

“The pinch may have come from consumer demand itself. Although cost inflation may have been the slowest in two years… headline inflation, on the side of the buying public, may have put a dent in general consumer demand,” Mr. Asuncion said.

“The congestion in ports may have also impacted manufacturing activity partly. The fact that personal inflows impact was expected to positively drive manufacturing — but results say otherwise — indicate that elevated general level prices did impact consumer demand.” — Elijah Joseph C. Tubayan

ASEAN Manufacturing Purchasing Manager's Index, December