PSA: Manufacturing declines for eighth straight month in July

By Mark T. Amoguis
Senior Researcher

FACTORY OUTPUT once again declined in July, extending its contracting streak to eight straight months, the government reported on Thursday.

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 — declining by 8.1% year on year in July versus the June’s revised 11.6% contraction and the 10.1% growth in July 2018.

Manufacturing production has been registering a decline since December 2018.

Factory output decline averaged 9.9% as of July compared to the 13% growth average in 2018’s comparable seven months.

Six out of 20 subsectors registered declines in July, led by double-digit contractions in petroleum products (-75.8%) and furniture and fixtures (-24.8%).

Notably, food manufacturing, which is the largest subsector in terms of contribution to factory output, has snapped its eleven-month losing streak, growing by 8.4% in July.

In comparison, the Nikkei Philippines Manufacturing Purchasing Managers’ Index (PMI), which used a different set of parameters, improved that month to 52.1 compared to June’s 51.3 and July 2018’s 50.9, marking the strongest improvement in six months or the 52.3 logged in January. 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 84.3%. Twelve of the 20 sectors registered capacity utilization rates of at least 80%.

In a statement, National Economic and Development Authority Undersecretary for Policy and Planning and current Officer-in-Charge Rosemarie G. Edillon said that the decline in construction-related manufactures reflected the deceleration in public infrastructure spending on infrastructure since the first half of this year.

“The slowdown on the implementation of infrastructure projects in the first semester of 2019 contributed to the weak performance of the manufacturing sector…” she said.

Rizal Commercial Banking Corp. (RCBC) economist Michael L. Ricafort blamed the July factory output drop on base effects as “there was some frontloading of purchases, loans and investments by some manufacturers when inflation and interest rates were on a rising trend” last year.

He also cited the escalating US-China trade war that weighs on the global economic outlook, including trade.

POLICY UNCERTAINTY
Mr. Ricafort also attributed the decline to the “wait-and-see” stance adopted by some investors as they await enactment of proposed changes to current tax incentives. The Tax Reform for Attracting Better and High-Quality Opportunities bill, which did not pass the previous Congress, was refiled this year under a new name — the proposed Comprehensive Income Tax and Incentive Rationalization bill. It seeks to gradually trim the corporate tax rate to 20% by 2029 from 30% currently — the highest in Southeast Asia — and remove incentives deemed redundant.

Socioeconomic Planning Secretary Ernesto M. Pernia said last month that the economy needs to be opened up further, noting: “We have too many restrictions.”

For RCBC’s Mr. Ricafort, some manufacturers are waiting for both the domestic inflation and interest rates to bottom out “before they become aggressive in borrowing… for new manufacturing investments and expansion projects.”

Nevertheless, Mr. Ricafort is optimistic that manufacturing can recover in the remaining months of the year.

“Local manufacturing activities and growth could pick up in the coming months of 2019 due to the easing base/denominator in the latter part of 2019,” he said, adding that “any prompt approval into law the rationalization of fiscal incentives that would provide greater certainty especially for some manufacturers… could help attract more investments (both local and foreign) into the country including in the manufacturing sector.”