Manufacturing growth eases to 9-month low

FACTORY OUTPUT grew at its slowest pace in nine months in March, as elevated inflation and high interest rates dampened demand for manufactured goods, analysts said.

Preliminary results of the latest Monthly Integrated Survey of Selected Industries (MISSI) by the Philippine Statistics Authority (PSA) reported on Tuesday showed manufacturing output, measured by the volume of production index (VoPI), grew by 2.2% year on year in March.

This was slower compared with the revised 5.2% growth in February, and the 346.2% growth in the same month last year.

March also marked the slowest pace of manufacturing growth since the 0.005% decline in June last year.

On a monthly basis, the manufacturing sector’s VoPI increased by 2.3% in March, recovering from the 2.9% contraction the previous month. But stripping out the seasonality factors, VoPI dipped by 1.1% from the 2.8% fall in February.

For the first quarter of the year, factory output grew by 5.7%, decelerating from 76.8% growth in the same period in 2022.

In comparison, IHS Markit’s Philippines Manufacturing Purchasing Managers’ index (PMI) eased to 52.5 in March from 52.7 in February. A reading above 50 marks improvement for the manufacturing sector while anything below indicates deterioration.

In a Viber call interview, Ser Percival K. Peña-Reyes, director at the Ateneo Center for Economic Research and Development, said that base effects are at play given the higher base last year. He also noted that elevated inflation and high interest rates also impacted manufacturing output.

Inflation eased to 7.6% in March, from 8.6% in February.

To curb inflation, the Philippine central bank has raised borrowing costs by 425 basis points since May last year, bringing the key policy rate to 6.25%.

HSBC Association of Southeast Asian Nations economist Aris Dacanay said March’s VoPI was in line with the falling exports and moderating PMI figures as the manufacturing sector was hurt by softer domestic demand.

“This also reflects the general expectation that GDP (gross domestic product) growth continued to ease in the first quarter of the year and may continue to do so in the quarters ahead,” he said in an e-mail note.

A BusinessWorld poll last week yielded a median of 6.1% for the first-quarter GDP of the Philippines. If realized, this will be slower than the 7.1% in the previous quarter, and 8% in the first quarter of 2022.

While slower manufacturing growth was mainly due to the decline in exports, Mr. Dacanay said it was also affected by softer demand for manufactured products.

“High inflation and high interest rates likely took a toll on overall domestic demand, but we also saw demand shift from consuming goods to services such as restaurants and travel when the economy reopened since consumers couldn’t enjoy these kinds of services as much when pandemic-related restrictions were in place,” he said.

According to the PSA, the slowdown in VoPI in March was brought by the following sectors: beverages (4.9% from 20.9% in February); chemical and chemical products (-25.5% from -7.8%); and basic metals (18.6% from 28.1%).

Out of 22 industry divisions, 12 posted annual declines, led by manufacture of wearing apparels (-40.2% in March from -24.3% in February); furniture (-26.8% from -23.6%); and tobacco products (-25.3% from -13%)

Meanwhile, 10 divisions registered growth in March. Transport equipment led with 25.3% increase that month. However, this was slower than the 29% uptick in February. Coke and refined petroleum grew by 8.2% in March from 2.4% the previous month.

The capacity utilization rate averaged 73% in March, up from 72.7% in February and 70.8% in the same month a year ago. All 22 sectors had an average capacity utilization rate of at least 50%.

HSBC’s Mr. Dacanay said that he sees weaker demand in the coming months as the impact of Fed rate hikes started to be felt.

“Domestic demand should also moderate with the Philippine economy going through a tightening cycle of its own,” he added. — B.T.M.Gadon