Manufacturing grows at slower pace in December

MANILA, Philippines — The local manufacturing sector expanded at a steady but slightly slower pace in December due to a slowdown in export orders and continuing input cost pressure, according to latest data of the Nikkei Philippines Manufacturing Purchasing Managers’ Index (PMI).

The latest reading of the Nikkei PMI came in at 54.2 in December, marginally down from 54.8 in November, still pointing to a solid improvement in the health of the sector as a reading below 50 indicates worsening business conditions.

IHS Markit, the firm that collected data for the index, noted that while the growth in output and new orders were slower in December compared with the previous month, the PMI remained above the 2017 average.

Export sales, it said, registered the weakest expansion in four months. As such, domestic demand continued to be the main growth driver in December.

Philippine manufacturers also continued to feel the pinch of input cost inflation as they continued to stock up on raw materials, in turn putting more pressure on supply chains. Higher input costs were attributed to increased raw material prices, weaker exchange rate, custom tax hikes and supply shortages.

Firms continued to hire more workers to meet new orders and reduce backlogs but still struggled to meet delivery deadlines. IHS Markit said December data indicated the “steepest deterioration” in vendor performance since the survey for the Philippines started in January 2016.

The headline PMI is a composite index based on five key indicators: new orders, output, employment, suppliers’ delivery times and inventories of inputs.

Despite these challenges, local manufacturers maintain an optimistic outlook for the 12 months ahead.

“Business expectations about output in the year ahead strengthened to a four month high, while firms increased labor capacity and purchasing activity during December,” said IHS Markit economist Bernard Aw.

As factory input prices may have already peaked in December, it is expected to start easing, making it possible for domestic inflation to remain within the government target of two to four percent in 2018.

“The PMI’s gauge of input prices, which exhibits a strong relationship with official consumer inflation data, slowed in December, suggesting headline inflation may have peaked and is likely to turn down from its current three-year high,” said Aw.

“Notably, inflation has been pushed higher by increased oil and food prices as well as a weak exchange rate. As these pressures subside, the likelihood is inflation will remain within the central bank’s target of two to four percent in 2018,” he added.