Factory activity picks up in January

By Beatrice M. Laforga
Reporter

THE Philippines’ manufacturing sector is off to a good start this year as factory activity in January improved at its strongest rate in a year, in contrast to the generally subdued performance across the Association of Southeast Asian Nations (ASEAN).

In a statement on Monday, IHS Markit reported its Philippines Manufacturing purchasing managers’ index (PMI) had a 52.1 reading in January, improving from the 51.7 in December and signalling “a moderate improvement in operating conditions at goods-producing firms.”

IHS Markit noted the Philippine factories benefited from faster growth in output and new orders, even as suppliers were affected by the Taal Volcano eruption and worsening traffic conditions.

Last month’s reading matched that of October last year and was the strongest improvement since January 2019’s 52.3 print.

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 50 denotes improvement in operating conditions compared to the preceding month, while a reading below 50 signals deterioration.

Out of the seven countries monitored in the ASEAN, Myanmar continued to top the list with a PMI of 52.7 to register a “solid improvement” after a slight loss of momentum the previous month, just above the Philippines and Vietnam, which booked a “marginal growth” at 50.6.

Despite the uptick seen in the top three countries’ PMI readings, ASEAN factory activity continued to see a slight deterioration even as the PMI inched up to 49.8 from 49.7 in December last year. This, however, is its softest decline since the downturn started in June 2019.

“Overall, the ASEAN manufacturing sector remained in a subdued state at the start of 2020. Despite some positive signs, further momentum is required for the sector to return to growth,” IHS Markit said.

IHS Markit said Philippine production levels increased at a “notably stronger pace” in January from the previous month, buoyed by faster growth in new orders and the start of new contracts.

Filipino manufacturers said output was limited after the Taal Volcano erupted on Jan. 12, “though this only partly dented overall growth,” according to the report.

Some factories in the Cavite-Laguna-Batangas-Rizal-Quezon (Calabarzon) area earlier reported disruption in their operations due to ashfall from the volcanic eruption.

New orders also rose solidly on the back of stronger demand from customers here and abroad. It said the growth in export sales, which increased for the third time in four months, indicated an “improvement in the trade climate for goods exporters.”

IHS Markit economist David Owen said in the report that if the trade climate from improved US-China relations is sustained, export sales “could strengthen further this year.”

Meanwhile, greater output growth, “the fastest since last August,” was due to stronger purchasing activity in January, with firms commenting on “higher input requirements since December.”

“As a result, stocks of purchases grew solidly. By comparison, stocks of finished goods expanded only marginally.”

Manufacturers, however, noted a “sharp deterioration” in the performance of suppliers, as traffic problems for vendors worsened due to the eruption mid-way through the month.

“As a result, lead times lengthened at the fastest rate for over two years, extending the current run of deterioration in vendor performance that began last August,” it said.

Mr. Owen said it is important to note that the manufacturing sector was able to maintain its growth despite the eruption of Taal Volcano last month, which “notably affected” some businesses.

“However, one clear issue heightened by the eruption was road traffic, which has disrupted delivery times in each of the past six months,” he said.

“The government is seeking to address this with their ‘Build, Build, Build’ project to place greater investment in road infrastructure. This is clearly an important project for manufacturers, with several pinning confidence around future output onto improved traffic conditions,” Mr. Owen said.

On the other hand, hiring activity “remained subdued” last month despite improved output and new orders, with job numbers declining for the first time in seven months after showing a slight uptick at the end of last year.

The additional workers hired by some firms in January was offset by some companies that did not replace workers that had resigned. Volumes of outstanding work still declined.

Meanwhile, selling charges also rose at a quicker pace last month as manufacturers raised their charges amid higher prices of raw materials, including oil and foodstuff.

Moving forward, the survey showed firms’ outlook for output in the coming 12 months improved in January to its “second-strongest in eight months…, as firms mentioned that their schedules of new projects should support greater activity.”

Sought for comment, Security Bank Corp. Chief Economist Robert Dan J. Roces said the survey “may not have fully reflected Taal’s effects given the study range” which noted a minimal effect, but the greater impact of eruption can be expected on February’s reading.

“Yet, in spite of the sector’s resilience from the eruption, it’s clear that manufacturing activity will be facing some other major near-term headwinds, chief of which will be fallout from the nCov (novel coronavirus, 2019-nCoV) that could affect demand and trade activities,” Mr. Roces said in an e-mail.

For ING Bank Manila NV Senior Economist Nicholas Antonio T. Mapa, “The bulk of manufacturing remains in relation to the agriculture sector and we do expect a possible slowdown in PMI going forward as new orders pull back given the Taal eruption and now the current malaise from 2019-nCoV.”

“We hope authorities can get a quick and firm hold on the virus to help ensure the health of the Filipinos and for economic activity to get back to normal at the soonest,” he added.