Factory production contracts in March

By Mark T. Amoguis
Assistant Research Head

FACTORY OUTPUT contracted in March, dropping to its lowest reading in three months as the enhanced community quarantine (ECQ) implemented in mid-March halted economic activity in Luzon, the Philippine Statistics Authority (PSA) reported on Tuesday.

Preliminary results of the PSA’s Monthly Integrated Survey of Selected Industries (MISSI) showed factory output — as measured by the Volume of Production Index (VoPI) — declined by 6.3% annually that month, compared to the revised four-percent growth in February and 8.8% contraction recorded in March last year.

Snapping the two-month growth streak for the year, the March reading was the lowest since the 7.2% decline in December 2019.

Year to date, factory output shrank by 0.5% compared to the 7.4% contraction in last year’s comparable three months.

In comparison, the IHS Markit Philippine Manufacturing Purchasing Managers’ Index — a leading indicator of manufacturing activity — slumped to a record low of 39.7 in March from 52.3 in February, marking a deterioration in operating conditions. A reading above 50 signals expected improvement in purchasing activity, while a score below 50 indicates deterioration.

The PSA MISSI reported year-on-year VoPI declines in 15 out of 20 industry groups, of which 10 were in double digits. The largest contractions were noted in petroleum products (-34.3%), tobacco products (-33.9%), and miscellaneous manufactures (-29%).

Capacity utilization rate, which indicates how much factory capacity is in use, averaged 84.5%. Twelve out of the 20 sectors posted capacity utilization rates of at least 80%.

LOCKDOWN BLAMED
Analysts attributed the factory output contraction in March to the ECQ in Luzon and select areas in the Visayas and Mindanao since mid-March.

“The ECQ on Luzon in the final two weeks of March was the main drag on local manufacturing, as well as on the broader economic growth as this resulted in lost production, income, and jobs for the most vulnerable sectors of society,” Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in an e-mail response to questions.

In an attempt to arrest the growing number of coronavirus disease 2019 cases in the country, President Rodrigo R. Duterte ordered a Luzon-wide lockdown on March 16. Originally set to last until April 12, the quarantine has been extended twice since then — up to April 30 for the entire Luzon island and until May 15 for Metro Manila, Central Luzon, and Calabarzon Region.

Under the ECQ, select business establishments remained opened such as supermarkets, drugstores, and banks, while cargo transporting basic goods would be allowed to freely cross various checkpoints in the island.

Mr. Ricafort said the economy “could slow down to low single-digit levels partly due to the contraction in manufacturing,” as the sector accounts for about a fifth of the gross domestic product annually.

Philippine Exporters Confederation, Inc. (Philexport) President and Chief Executive Officer Sergio R. Ortiz-Luis, Jr. said the decline in the manufacturing sector will be not as much as that in services, which contribute more than half of the country’s economy.

“The hardest hit would be services, especially the tourism sector. For the manufacturers, I think 30% of them are operating because there are exempted sectors like exporters and food processors. So, I guess the contribution on the negative side will not be as much as that for services,” he said in a phone interview.

Mr. Ortiz-Luis said that the manufacturing sector’s rebound will “depend on how fast we get out of the lockdown.”

“It would take about six months for them to get into full operation…,” he said.

For RCBC’s Mr. Ricafort, he said that manufacturing could contract further in April, but could start to improve starting May if the lockdown in Metro Manila and some parts of Luzon will be lifted gradually after May 15.