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July manufacturing activity extends glut

REUTERS

FACTORY ACTIVITY in the Philippines continued to expand in July, in contrast to the broad contraction in Southeast Asia where many economies are grappling with a fresh surge in coronavirus infections, a survey by IHS Markit showed on Monday.

The Philippine Manufacturing Purchasing Managers’ Index (PMI) stood at 50.4 last month, slipping from 50.8 in June but remained above the 50 neutral mark that separates contraction from expansion.

This marked the second month in a row the index showed an expansion after worsening in April and May.

Manufacturing Purchasing Managers' Index of Select ASEAN Economies, (July 2021)

“Latest data revealed only a slight expansion in operating conditions across the Philippine manufacturing sector, with declines in output and new orders persisting in July,” IHS Markit said.

The Philippine manufacturing sector recorded the highest PMI among six Southeast Asian economies surveyed. Factory activity for the rest of the economies shrank in July — Thailand with 48.7, Vietnam with 45.1, Indonesia and Malaysia both with 40.1 and Myanmar with 33.5.

“Although the Philippine manufacturing sector recorded another improvement in operating conditions during July, latest data revealed domestic demand and production levels were still impacted by the pandemic,” Shreeya Patel, an economist at IHS Markit, said in the statement.

Filipino manufacturers continued to report lower new orders due to weak demand amid the ongoing health crisis and as consumers remained cautious in spending, according to IHS Markit.

This was offset by the improving external demand for local goods which rose for the third month in a row in July amid a better global economic landscape.

However, production continued to decline for the fourth straight month in July due to slow orders, but showed a slight improvement from June’s output.

Manufacturers laid off employees again for the 17th month in a row due to lower production and since past voluntary resignations were not replaced. IHS Markit noted that the decline in employment was the softest since March.

Longer supplier lead times were also recorded, which was attributed to shortages in raw materials and quarantine restrictions.

IHS Markit said buying activity improved for the second month in a row, with companies stocking up on their inventories in preparation for a possible shortage and in anticipation of greater demand in the near term.

On prices, producers expected inflation to remain high but slightly lower than the previous months, due to costlier raw materials and the imposition of the 12% value-added tax (VAT) on locally obtained inputs by exporters. The Bureau of Internal Revenue suspended the implementation of the VAT on local inputs last week.

“Similarly, factory-gate prices rose during the month, with panel members noting a partial pass-through of higher expenses and the impact of the introduction of VAT,” IHS Markit said.

An improvement in the country’s vaccination rollout boosted overall sentiment, IHS Markit said, adding that it prompted factories to increase their stock of raw materials and manufactured goods.

The survey showed manufacturers expect better output in the next 12 months, with sentiment reaching a four-month high on hopes increased vaccinations will help the economy normalize.

Introduction of new products and a rebound in client demand also contributed to better sentiment.

“Nevertheless, domestic demand must improve throughout the second half of the year to help underpin growth in 2021,” Ms. Patel said.

However, manufacturing conditions may deteriorate as Metro Manila and four other provinces will be under an enhanced community quarantine from Aug. 6-20 amid the Delta variant threat.

“The Philippines’ index was the only one that kept its head above water among the ASEAN economies we track closely. But it is likely to have entered into the red this month, in view of the preemptive restrictions the government will be instituting to mute the potential spike in Delta cases,” Miguel Chanco, senior Asia economist at Pantheon Macroeconomics said on Monday.

Rizal Commercial Banking Corp. (RCBC) Chief Economist Michael L. Ricafort said local manufacturing activities could slow during the lockdown.

“Going forward, risk of lockdown orders in the National Capital Region in an effort to help reduce new COVID-19 local cases that have been relatively higher on a daily basis recently… could result in slower recovery in production, sales, net income/livelihood, jobs and other economic activities, especially for hard-hit sectors,” he said in a note.

Meanwhile, lower infections and further reopening of the economy should improve manufacturing conditions in the country.

The Health department reported 8,167 COVID-19 infections on Monday, bringing the number of active cases to 62,615. — Beatrice M. Laforga

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