Higher input costs seen dampening factory output despite July recovery

MANILA, Philippines — Local factories recovered in July as they ramped up production but higher input costs could impair growth in coming months.

What’s new

Results of PSA's monthly survey of selected industries revealed the volume of production index (VoPI), a measure of manufacturing output, rose 2.5% year-on-year in July, higher compared to the 0.7% expansion recorded in June.

This was the 14thth straight month that VoPI expanded.

Why this matters

Economic managers look to manufacturing output as a barometer of economic welfare as it can be an indicator of demand situation in the country, where consumer spending is a major growth driver.

When factories churn more finished products, this could be a sign of strong consumer demand. When demand is robust, manufacturers tend to hire more workers to avoid backlogs which, in turn, generates employment for the country.

What an analyst says

For Domini Velasquez, chief economist of China Banking Corp., the manufacturing sector will be pressured by inflation in the coming months. Inflation is surging nationwide due in part to resurgent consumption, expensive fuel prices, and a weak peso. 

“Moving forward, higher producer prices will continue to affect the manufacturing sector in terms of expansion plans and hiring more workers. In this morning’s labor force survey release, national statistician Mapa highlighted job losses in manufacturing such as in semiconductors and bakeries, due to increasing input costs,” she said in a Viber message. 

Velasquez pointed out that while VoPI grew, the index was already declining on a monthly basis due to higher prices. 

“Similar to the Purchasing Managers’ Index, we expect MISSI to stabilize in the next few months. Continued rise in production prices and interest rates will inhibit robust growth until at least early 2023,” Velasquez added. 

Other figures

• Fourteen industries expanded in July, led by the manufacture of fabricated metal products, which rose at a pace of 30.3% year-on-year. 
• Eight industries led by the manufacture of electrical equipment saw output sag in the same month.
• More than one-fourth of factories were operating at full capacity, as average capacity utilization crept up 71.3% from 71.2% in June.