Despite rising costs, manufacturing sustains growth
The domestic manufacturing sector sustained its growth in May, helped by the significant increase in demand and faster expansion of businesses, according to the latest results of the Nikkei Philippines Manufacturing Purchasing Managers’ Index (PMI).
The headline PMI for the Philippines registered a higher reading of 53.7 in May from 52.7 in April, the highest so far this year.
The headline PMI is a composite index based on five key indicators: new orders, output, employment, suppliers’ delivery times, and inventories of inputs. It is designed to provide a quick review of the performance of the manufacturing sector each month. A reading of above 50 indicates expansion, while a reading below this points to a contraction.
Increased domestic demand brought about by the higher take home pay – as income tax cuts were more felt – encouraged manufacturers to boost production. New orders grew at the fastest pace since November last year even as export sales cooled.
Despite this, hiring was slower because of lack of capacity pressure in factories. Some purchasing managers also reported layoffs due to cost-cutting measures.
Purchasing of inputs were also elevated but firms continued to feel the pinch of price pressure, said IHS Markit, the firm that compiled the data for the survey.
The report also said suppliers faced difficulties coping with increased demands as indicated by diminished vendor performance attributed to shortage of raw materials, port congestion, and poor traffic conditions.
Input-cost inflation intensified midway through the second quarter because of a combination of factors: a weaker peso, input supply shortage, higher global commodity prices, and the new excise taxes that came with tax reform.
“The upturn in the manufacturing sector gained further momentum in the middle of the second quarter, lifted by strengthening demand conditions. The adverse impact caused by the new tax reforms has clearly subsided,” said IHS Markit principal economist Bernard Aw.
“However, input-cost inflation intensified in May, but some of the upward pressures are driven by a weaker exchange rate, global commodity shortages and higher oil prices, not just from new excise taxes,” he added.
Business confidence, however, remained high in May, with most firms optimistic that product launches, opening of new outlets, promotional activities, and increased productivity will drive output growth in the next 12 months.
Aw also noted that as of May, firms raised prices at a slower rate so as not to lose the demand momentum.
“PMI data showed firms raising selling prices at a slower rate in May amid rising costs, suggesting that companies may have a threshold of the extent to which their customers can bear higher prices without affecting demand. The good news is that improving demand conditions permitted firms to share some of the higher costs with their customers. Survey indicators point to increasing economic activity in the coming months,” he said.