Factory output slips for 1st time in 2 years

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By Lourdes O. Pilar

FACTORY OUTPUT contracted in July, snapping 24 straight months of growth, the Philippine Statistics Authority (PSA) reported yesterday.

In its latest Monthly Integrated Survey of Selected Industries (MISSI), the PSA said the volume of production index — a measure of factory output — declined 1.1% at the start of the third quarter, a reversal from the 6.8% growth registered in June, and July 2016’s 12.1%.

Year-to-date factory output growth averaged 7.8%, a few points below the low end of the government’s annual 8-10% target for the sector over the next six years.

Pulling down factory output were contractions in eight major sectors, mostly heavily weighted, namely: chemical products (-52.6%); textiles (-20.3%); rubber and plastic products (-13.9%); wood and wood products (-9.4%); beverages (-6.0%); “miscellaneous” manufactures (-8.1%); tobacco products (-3.5%), and petroleum products (-1.1%).

“The decreases were due to the lower production of petroleum products and chemicals… Such were caused by a large decline in the production of fuel products and the lingering effects of maintenance activities undertaken in the first half of 2017,” the National Economic and Development Authority (NEDA) said in a statement.

Union Bank of the Philippines, Inc. chief economist Ruben Carlo O. Asuncion blamed the contraction in manufacturing on shrinking imports. “This is somehow connected to the decline in imports where much of intermediate goods in the manufacturing sector are basically imported,” he said. “More expensive imports can deter the surging manufacturing sector.”

De La Salle University Economics Department vice-chairman Mitzie Irene P. Conchada shared this view, saying the slight drop in factory output “could be attributed to the increasing cost of imports used as inputs” due to the peso’s depreciation against the greenback, affecting prices and overall volume of production.

The average capacity utilization rate in July — the extent by which industry resources are used for the production of goods — averaged 83.7% for July, with 12 of the 20 major industries operating at capacities of at least 80%.

Earlier reports had also noted the manufacturing sector’s slowdown. For one, the Nikkei Philippines Purchasing Mangers’ Index – which tracks factory activity in terms of new orders, output, employment, suppliers’ delivery time and inventory – saw the country’s reading ease for the third straight month to 52.8 in July, marking the sector’s weakest performance so far since the Philippine survey began in January last year. IHS Markit, which conducts the monthly survey for Nikkei, Inc., noted “signs of softening demand,” particularly as seen in new orders. Moody’s Analytics separately estimated MISSI’s annualized growth at 7.3% in July, slower than the 8.1% increase in June.

Going forward, UnionBank’s Mr. Asuncion expects factory output to recover, saying: “I still see the continuing emphasis on building infrastructure as an important support to the further growth of the Philippine manufacturing sector.”

“We expect higher manufacturing outputs in the coming months as we expect an increase in consumer demand during the holidays, translating to higher production in volume and sales,” Socioeconomic Planning Secretary Ernesto M. Pernia said in the statement by NEDA, which he heads as director-general.