Factory activity plunges to record low

FACTORY ACTIVITY slumped to a record low in March, snapping a 43-month growth streak, as the Luzon-wide lockdown due to the coronavirus disease 2019 (COVID-19) pandemic brought factories to a halt.

In a statement on Wednesday, IHS Markit reported that the Philippines Manufacturing Purchasing Managers’ Index (PMI) decelerated to 39.7 last month from the 13-month high of 52.3 in February, signaling a “marked deterioration in operating conditions.”

March was the first time the Philippines’ manufacturing PMI slumped below the 50 neutral mark, breaking its streak of steady growth since August 2016 when the survey for the Philippine leg started.

A PMI reading below 50 signals deterioration in operating conditions compared to the preceding month, while a reading above 50 denotes improvement. 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%).

“The COVID-19 pandemic took its toll on goods production in the Philippines in March, as the enforced lockdown of Luzon island led many manufacturers to halt operations until restrictions are lifted. These shutdowns led to sharp declines across the sector, with output, new orders, employment and stocks of purchases all falling at record paces,” David Owen, an economist at IHS Markit, was quoted as saying.

The Philippines had the second worst-performing manufacturing activity among Association of Southeast Asian Nations (ASEAN) countries last month, ahead of Singapore’s PMI which fell by a record 18.1 points to 27.7.

IHS Markit said ASEAN manufacturers had their worst month on record, as operating conditions contracted by its steepest pace since the survey began in July 2012. The region’s headline PMI fell to 43.4 in March from 50.2 in February.

“ASEAN manufacturers felt the full force of the coronavirus pandemic in March. The headline PMI dropped to the lowest in the survey’s near eight-year history, amid record contractions of output, new orders, inventories and employment. Notably, March was the first time on record that all of the seven constituent countries posted a deterioration in the health of their respective manufacturing sectors simultaneously,” Lewis Cooper, economist at IHS Markit, said.

Mr. Cooper noted the fallout from the COVID-19 pandemic is likely to be felt for “several months to come, if not longer.”

IHS Markit said the downturn in manufacturing production was due to the enhanced community quarantine implemented by the government in Luzon. This led to shutdowns of factories and a decline in production levels.

Demand from customers also plunged, with volume of new orders falling “at the fastest pace in the series history,” IHS Markit said.

“Exports were similarly down as surrounding countries enforced their own lockdowns whilst curtailing foreign orders,” Mr. Owen said.

IHS Markit also cited lower buying activity as companies scrambled to recover costs and restructure stocks, while inventories of raw materials and stocks of final products also fell.

As input costs fell, companies lowered selling prices drastically to drive sales, IHS Markit said.

However, some manufacturers also had to lay off workers due to production shutdowns.

IHS Markit noted suppliers experienced problems as they saw slower deliveries from China and the ECQ restricted movement of supplies.

“Firms that remained open meanwhile saw a large delay in supplier delivery times, restricting their ability to operate at full capacity,” Mr. Owen said.

As expected, outlook of Philippine manufacturers “fell to its least optimistic in the series history in March.” Overall confidence was slightly positive as uncertainties over the economic fallout from the pandemic remains, IHS Markit said.

“However, hopes of a swift return to normal operations and a rebound in new contracts helped to partly offset these downbeat predictions,” the report added.

UnionBank of the Philippines, Inc. Chief Economist Ruben Carlo O. Asuncion said the government’s move to restrict movement in Luzon, where 73% of the country’s economic activity occurs, “is easily locking down way more than half of the economy.”

“The downward trend may continue unless a modified version of the ECQ is pushed in the coming months, where more restrictions on the movement of people will be lifted including a freer supply chain flow,” Mr. Asuncion said in a Viber message yesterday.

He said implementing a modified community quarantine where movement restrictions will be eased partially along with more relaxed supply chain flow will give the economy higher chances of a sharp recovery.

“As the ECQ buys time for healthcare systems to prepare and not be overwhelmed, the likelihood of economic activity coming back to pre-COVID-19 levels is higher,” he said.

“The ECQ and its effect on limiting mobility and shutting down offices and factories knocked down both new orders and production and we can expect this trend to worsen for the April figures should the ECQ continue,” ING Bank N.V.-Manila Senior Economist Nicholas Antonio T. Mapa said in a note sent to journalists yesterday. — Beatrice M. Laforga