Philippines: Manufacturing sector weakens further in February
March 1, 2018
The manufacturing Purchasing Managers’ Index (PMI) declined to 50.8 in February, down from 51.7 in January according to a release provided by Nikkei and IHS Markit. The PMI nevertheless remained slightly above the critical 50-point threshold which separates expansion from contraction in the manufacturing sector.
February’s weakening was due to the first job losses in the sector in five months. Growth in new orders strengthened somewhat, to which firms reacted by scaling up production and tapping on current stocks. As backlogs of work fell, and demand pressures were soft, companies reduced staff levels.
On the price front, input prices rose notably due to higher excise taxes, a weaker peso and higher global commodity prices. This led to robust cost inflation and higher selling prices, with selling prices rising at the fastest pace on record. On a more positive note, businesses remained broadly optimistic in February, although confidence fell to the lowest in survey history.
Commenting on the release, Bernard Aw, Principal Economist at IHS Markit, noted that:
“The persistent lack of capacity pressure, as indicated by declining backlogs, weighed on hiring. However, what’s particularly concerning was the tighter squeeze on profit margins as inflationary pressures built rapidly to survey-record rates. There were reports of layoffs as part of efforts to reduce costs. Firms continued to blame higher excise tax rates and increased commodity prices, especially in oil, plastics and paper, for the sharp cost increase. A weaker peso also worsened the impact of higher import costs.
While the influence of tax reforms is expected to fade in coming months, price pressures could still become more entrenched on rising imported inflation, which will add to calls for the Bangko Sentral ng Pilipinas (BSP) to raise interest rates. In the recent policy meeting, governor Nestor Espenilla commented that headline inflation is likely to break above the 2-4% range target in 2018, but more evidence of rising price trends is necessary before deciding to tighten policy.”