Factory activity eases in Feb. amid rising costs

PHILIPPINE FACTORY activity grew at a slower pace in February, as stubbornly high costs and supply chain challenges weighed on the sector, S&P Global said.

The S&P Global Philippines Manufacturing Purchasing Managers’ Index (PMI) reading stood at 52.7 in February, down from 53.5 in January, which “signaled the softest improvement in operating conditions in three months.”

The latest PMI reading matched the 52.7 reading in November 2022, and was the lowest since 52.6 in October 2022.

“According to the latest PMI data, growth across the Filipino manufacturing sector remained solid midway through the first quarter of 2023, albeit easing slightly from January. Both production levels and factory orders rose at solid rates and were stronger than their respective historical averages,” Maryam Baluch, economist at S&P Global Market Intelligence, said in a statement.

February marked the 13^th straight month that the PMI reading was above the 50 mark, which denotes improvement in operating conditions. A reading below 50 signals deterioration.

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 Philippines’ PMI reading was the second fastest among six Association of Southeast Asian Nations (ASEAN) member countries, behind Thailand (54.8). It was ahead of Indonesia and Vietnam (both at 51.2) and Myanmar (51.1). Factory output contracted in Malaysia (48.4).

S&P Global said production and new orders in the Philippines expanded in February, but at a slower rate.

“As per anecdotal evidence, greater demand from customers and a growing clientele helped drive the latest upturns,” it added.

Firms increased purchasing activity for a sixth straight month, while pre-production inventories rose for an 18^th month in a row.

“Greater production requirements meant that firms also raised their purchasing activity… Similarly, Filipino firms were keen to maintain their stocks in anticipation of greater sales in the months ahead,” S&P Global said.

COST BURDENS
Meanwhile, S&P Global flagged some “areas of concern” for Philippine manufacturers, such as high costs, a drop in employment and “bleak” supply chain conditions.

“Higher prices at suppliers directly fed into cost burdens, causing input price inflation to rise at a rapid and accelerated pace,” Ms. Baluch said.

S&P Global noted the seasonally adjusted employment index slipped for a second month in a row. This also signaled the first drop in workforce numbers since November.

“There were reports of resignations, with several firms also actively laying off staff. That said, the pace of job shedding was marginal overall. Additionally, Filipino manufacturing firms registered a renewed fall in backlogs of work,” it added.

Supply chain problems also continued to weigh on the sector in February.

“Supplier performance worsened further, and to a greater extent, as material scarcity, port congestion and difficult transportation conditions resulted in a further lengthening of average lead times,” Ms. Baluch said.

Despite the challenges, S&P Global said manufacturing firms kept a positive outlook for the year.

While half of the respondents see higher output in the next 12 months, it noted that sentiment was weaker from January “as concerns regarding competition and the rising costs of inputs seeped into expectations.”

“Despite the ongoing supply-side challenges and an uncertain international climate, the Filipino manufacturing sector has remained resilient, benefiting greatly from domestic demand. Firms hope that the buoyancy in the market is maintained as we progress further into the year,” Ms. Baluch said.

ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said worsening supply problems may have led to persistent cost pressures.

“Higher input costs and supply constraints may have led to the slower expansion, on top of concerns about how sustainable the recent string of expansion will be,” he said in a Viber message.

China Banking Corp. Chief Economist Domini S. Velasquez said logistics issues and higher costs will remain challenges for the sector.

“Moving forward, we expect PMI prints to remain moderately in expansion with China’s added boost. However, cost pressures from higher domestic prices will continue to dampen the outlook for the sector,” she said in a Viber message. — Luisa Maria Jacinta C. Jocson