By Elijah Joseph C. Tubayan
FACTORY ACTIVITY in the Philippines saw the biggest improvement in 10 months in October, keeping the country in the lead in Southeast Asia, according to the latest survey which IHS Markit conducted for Nikkei, Inc. that cited “a sharp rise in demand for manufactured goods.”
The Nikkei Philippines Manufacturing Purchasing Managers’ Index (PMI) rose to 54 in October from 52 in September, reflecting “solid improvement in the health of the sector.”
The Philippines remained at the helm of the seven Association of Southeast Asian Nations (ASEAN) members tracked by IHS Markit’s regional survey for the second straight month. Vietnam and Indonesia followed with 53.9 and 50.5 readings, respectively, and were the only other two Southeast Asian economies that improved from September.
The Nikkei ASEAN Manufacturing Purchasing Managers’ Index slid to 49.8 last month from 50.5 in September. “The index reading was the lowest recorded in 15 months and marked the first time since December 2017 that the PMI has posted below the no-change 50.0 level,” the regional report read.
A PMI reading above 50 indicates improvement in business conditions from the preceding month, while a score below signals deterioration. The manufacturing PMI is composed of five sub-indices, with new orders having the largest weight at 30%, followed by output at 25%, employment with 20%, suppliers’ delivery times with 15% and stocks of purchases with 10%.
Nikkei said that the latest reading reflected robust overall demand despite a decline in exports and a steep increase in prices.
“Business conditions improved solidly at the start of the fourth quarter, with the latest PMI data signalling a sharp rise in demand for manufactured goods in the Philippines. Both output and new business rose at a faster pace in October, with many firms reporting an influx of orders,” the report read.
“Purchasing activity also increased substantially, while employment rose for the third month running,” it added, even as it noted that “delivery times lengthened, in part due to port congestion.”
“Inflationary pressures persisted, leading to the sharpest rise in output prices seen in the survey history.”
Respondents also blamed longer customs checks and storms for longer delivery times.
Moreover, the report said that firms “continued to bear the burden of strong cost inflationary pressures.”
About 22% of respondents said their firms raised prices as 35% saw higher input costs amid elevated prices for raw materials, increased excise taxes under Republic Act No. 10963 or the Tax Reform for Acceleration and Inclusion Act (TRAIN) that took effect in January and the weaker peso.
“Looking ahead, goods producers in the Philippines remained strongly positive about future output. Many firms attributed this to the current upturn in business, while others hoped for a further increase in new clients and products,” the report said.
“That said, the level of optimism was the second-weakest in the series history.”
David Owen, economist at IHS Markit said in the report that inflation may start to slow towards yearend. “The recent trend suggests that price pressures are unlikely to relent in the coming months,” he said.
Economists asked BusinessWorld expect prices of widely used goods to have gone up by 6.7% in October, steady from September which had marked nine straight months of ascent.
Rizal Commercial Banking Corporation economist Michael L. Ricafort said separately that firms may have front-loaded production ahead of planned tax increases in 2019 such as those for coal and tobacco. “The rising trend in inflation, as well as prospects of higher taxes under the TRAIN law scheduled in January 2019 may have prompted some manufacturers to frontload production before prices and/or taxes increase further,” he said in an e-mail when sought for comment.
He also attributed growing manufacturing activity to the government’s rising infrastructure spending as well as the continued expansion of the real estate sector.
“The continued pick up in local manufacturing activities may be attributed to sharp growth in the government’s infrastructure spending as well as the continued growth in real estate activities that both increased the demand for construction- and real estate-related manufacturing activities, sustained strong growth in foreign direct investments that require the establishment of production facilities and subsequently add to manufacturing/production activities,” he explained
“Increased government spending — especially on infrastructure, partly in preparation for the May 2019 elections and for mega infrastructure projects — could continue to support the pickup in allied/related manufacturing activities such as construction materials and other related products.”