Factory activity improves slightly in Dec.

FACTORY ACTIVITY in the country improved modestly in December, driven by growing demand and higher exports, but production slowed to a two-year low, dragged by supply shortages and traffic issues, IHS Markit’s latest survey showed.

According to a report released on Thursday, the IHS Markit Philippines Manufacturing Purchasing Managers’ Index (PMI) reading inched up to 51.7 in December last year from 51.4 in November, its highest reading since October’s 52.1 and “in line with the average seen for the year (2019).”

Region-wide, the country continued to have the second-highest reading for the fifth straight month among the seven Association of Southeast Asian Nations (ASEAN) members covered by the survey, behind Myanmar’s PMI of 52 and outpacing Vietnam’s 50.8.

The Philippines continued to do better than the region’s average PMI of 49.8 last month — which improved from the 49.2 reading in November — indicating “consecutive deterioration in the health of the ASEAN manufacturing sector” for seven months in a row.

The headline PMI measures manufacturing conditions through the weighted average of five indices: new orders (30%), output (25%), employment (20%), suppliers’ delivery times (15%) and stocks of purchases (10%). A reading above the 50 level denotes improvement in operating conditions compared to the preceding month while below that signals deterioration.

“The improvement was partly driven by a solid rise in new orders received by Filipino manufacturers, with the rate of growth strengthening slightly from November,” the statement read.

Along with a “broad-based” increase in sales that month, it noted firms pointed to a slight uptick in new work from foreign clients which marked the second monthly increase in seven months.

However, stronger sales in December were offset by the marginal growth in production which stood at a “27-month low” or since September 2017, which some companies attributed “to delays in input deliveries and difficulties in sourcing raw materials curtailed production.”

According to firms surveyed, these delays were mainly due to heavy traffic affecting delivery time of suppliers as well as typhoons and congestion at the Manila port.

“Most notably for manufacturers though are clear supply-side issues that are restricting output. Growing road and port congestion, particularly in Manila, remain a key feature of businesses’ concerns,” said David Owen, economist at IHS Markit.

“Weaker output growth meant that businesses were less optimistic toward the outlook for production over the coming year,” the report said, adding that the level of positivity observed that month was “one of the weakest in the series’ history.”

Despite waning optimism, businesses still expect output to expand for this year on the back of strong sales growth and the state’s infrastructure projects.

“The government has announced its ‘Build, Build, Build’ program to address the problem which some firms are hopeful will reduce supply chain blockages. Nevertheless, for the moment, production is being limited, and may remain so until these issues have been addressed,” Mr. Owen added.

Meanwhile, employment in the goods sector posted a slight increase at the end of 2019 on the back of higher new orders.

“Backlogs of work meanwhile decreased further, as whilst deliveries of inputs slowed, firms saw little impact on the delivery of finished goods,” according to the report.

Input buying also increased in December but growth was at its “softest in ten months, and only modest,” which helped manufacturers expand their stocks of pre- and post-production goods.

Overall input price inflation eased as demand for inputs softened, while prices for some raw materials increased due to lack of supply.

In turn, the report said “average charges set by Filipino manufacturers were raised” modestly which can be traced to “the mark-up to higher demand for goods and greater cost burdens.” — Beatrice M. Laforga