Factory output continues to decline

By Mark T. Amoguis, Senior Researcher

FACTORY OUTPUT posted its sixth consecutive month of decline in May albeit at a slower pace, the Philippine Statistics Authority (PSA) reported on Friday.

Preliminary results of the PSA’s latest Monthly Integrated Survey of Selected Industries, showed factory output — as measured by the Volume of Production index — contracting by 4% year on year in May versus the revised 14.3% decline in April and the 13% growth in May 2018.

Year to date, the decline in factory output averaged 7.6% compared to the 14.2% growth average in 2018’s comparable five months.

Six out of 20 subsectors registered declines in May, led by double-digit decreases in furniture and fixtures (-35%) and food manufacturing (-14%). Other sectors that exhibited declines were miscellaneous manufactures (-8.5%), non-metallic mineral products (-7.1%), leather products (-6.4%), and basic metals (-5.9%).

A similar trend was observed in factory output as measured by the Value of Production index, which declined for the fourth straight month by 2.1%.

In comparison, Nikkei Philippines Manufacturing Purchasing Managers’ Index (PMI) was at 50.9, the weakest reading since July 2018 although it signaled a “marginal” improvement from the preceding month.

A reading above 50 signals improvement in business conditions from the preceding month, while a score below that point indicates deterioration.

Despite these declines in the volume and value of factory output, the National Economic and Development Authority (NEDA) noted in a statement that this was a “slight improvement” compared to the previous month’s performance.

“Despite these negative figures, we note a positive development for this month’s manufacturing performance upon seeing that the number of gainers in both indices has outpaced the losers. For one, 14 subsectors trended upwards trend compared to last month’s 10 subsectors,” Socioeconomic Planning Secretary Ernesto M. Pernia, who also heads NEDA as director-general, was quoted in the statement as saying.

Security Bank Corp. economist Robert Dan J. Roces attributed these declines to “supply issues” that affected the cost of essential inputs such as El Niño and “volatile power plus water rates.”

Mr. Roces added that export-oriented manufacturers were more affected by “external headwinds due to subdued global demand and logistical difficulties brought about by the trade war,” referring to the ongoing tensions between the US and China.

Rizal Commercial Banking Corp. (RCBC) economist Michael L. Ricafort was of the same opinion, adding that the easing trend in both inflation and interest rates since the start of the year “may have caused some manufacturers to wait for both prices and borrowing/financing rates to go down further before purchasing and borrowing more aggressively…”

“This is consistent with the slower growth in banks loans in the early part of 2019 that may have reflected slower growth in borrowings to finance new investments and expansion projects, including those in the manufacturing sector,” Mr. Ricafort added.

REBOUND EXPECTED
Economists expect manufacturing to bounce back in the coming months amid easing inflation and strong domestic demand.

“Moving forward, we expect manufacturing to recover on the back of better local household consumption with easing inflation, plus higher government spending on infrastructure as it ramps up its projects. A resolution of the trade war will also provide better conditions to the sector,” Security Bank’s Mr. Roces said.

Similarly, RCBC’s Mr. Ricafort expected the manufacturing production to pick up in the latter months of the year on account of the continued decline in inflation and interest rates that would encourage manufacturers to borrow more to finance new investment projects, as well as increased government spending that would stimulate production in related manufacturing industries, and easing base effects.

Mr. Pernia has noted the need to boost the productivity of the agriculture sector as well as strengthening supply chain linkages between local and foreign producers to increase food production.

“Food products, the largest subsector, has significant impact on the overall performance of the manufacturing sector,” Mr. Pernia said.

The volume of production in food manufacturing has been registering declines for ten straight months or since August 2018. Of those ten months, seven showed double-digit declines.

Average capacity utilization — the extent by which industry resources are used in the production of goods — was estimated at 84.4%. Eleven of the 20 sectors registered capacity utilization rates of at least 80%.