Factory output slows in July

Manufacturing activity continued to slow down in July, burdened by internal and external inflationary pressures, according to the Nikkei Philippines Manufacturing Purchasing Managers’ Index (PMI).

The headline manufacturing PMI registered a lower reading of 50.9 in July from 52.9 in June. This was the lowest in five months and was considered only a “marginal improvement in the health of the sector.”

This, however, still puts domestic factory activity in the growth path as a reading of below 50 indicates contraction. The headline PMI provides a quick overview of the health of the manufacturing sector based on output, new orders, job creation, inventories, and delivery times.

IHS Markit, the firm that compiled data for the PMI said slower increases in both output, new orders, input purchasing, and hiring of workers were recorded in July.

Purchasing managers who were surveyed for the index reported signs of softening demand at the start of the third quarter, prompting firms to lessen their input purchasing and scale back production volumes.

Even with slower purchasing of inputs, inflationary pressures “remain marked” as higher prices of raw materials contributed to input cost inflation, the report said. Steeper prices were recorded for commodities like diesel, plastics, and rice, it said.

The report attributed input cost inflation pressures to a weaker peso and effects of the tax reform law which has been enforced since the beginning of the year. This also led firms to raise selling prices anew in July.

As inflationary pressures remain elevated, business output expectations for the remainder of the year fell to the lowest in survey history.

IHS Markit principal economist Bernard Aw said firms are increasingly feeling the pressure to protect their profit margins.

“New business grew at a much slower rate in July after a solid second quarter, despite a strong pick up in export sales. Slowing demand presents a worrying development and raises questions whether the recovery from the rollout of new excise taxes at the start of this year is losing steam,” Aw said.

“One area where the TRAIN Law is still felt strongly is prices. However, external factors are also driving inflation. Survey evidence pointed to higher oil prices and a weaker peso. Input cost inflation remained marked in the manufacturing sector during July which, in turn, led to further increases in selling prices. Although charges were raised at a notable pace, the rate of increase remained far weaker than that of costs, suggesting pressure on profit margins,” he added.