PH manufacturing accelerates in May

THE Philippine manufacturing sector continued to gain momentum in May, an IHS Markit/Nikkei survey found, as improving demand conditions pushed the Purchasing Managers’ Index (PMI) to its highest in five months.
Results released on Friday showed a seasonally adjusted PMI of 53.7 for the month, a jump from April’s 52.7.

The result was the highest since the 54.2 recorded in December last year.

Reckoned from the 54.3 posted a year ago, however, the pace of growth was slower as inflationary pressures continue to hike input costs for manufacturers.

The PMI is a measure of the economic health of the manufacturing sector. It is based on several indicators including output, new orders, backlogs, output and input prices, suppliers’ delivery times, stocks of finished goods, purchases, employment and future production.

Nikkei said the latest reading marked a “solid improvement in the health of the sector.”

IHS Markit principal economist Bernard Aw pointed out that “The adverse impact caused by the new tax reforms has clearly subsided.”

Survey results, Nikkei said, showed further signs of improvement in client demand in the wake of tax reform measures that took effect at the start of the year.

New business inflows grew even as export sales growth cooled, while firmer order book expansion supported firms’ decisions to increase production, it reported.

Nikkei said output growth accelerated noticeably from April, with greater production requirements having led firms to step up purchasing activity to ensure a sufficient amount of input materials.

It noted that the rate of buying was also higher, resulting in stocks of purchases accumulating at a faster pace.

Post-production inventories were also up but suppliers faced difficulties coping with higher demand as reflected in a further deterioration in vendor performance during May, according to Nikkei.

It said survey evidence suggested a lack of raw materials, port congestion and poor traffic conditions had contributed to delayed shipments.

While stronger demand conditions failed to stretch operating capacity, the May data indicated a further drop in the level of unfinished work, stretching the trend of falling backlogs to well over two years.

Nikkei also said that a persistent lack of capacity pressure imposed no urgency on firms to boost hiring even as sales increase, and noted that there were some reports of layoffs due to cost-saving measures.

Higher inflation

“[I]nput cost inflation intensified in May, but some of the upward pressures are driven by a weaker exchange rate, global commodity shortages and higher oil prices, not just from new excise taxes,” Aw highlighted.

Aw said Brent crude prices gained nearly 7 percent in May while the peso had depreciated over 4 percent so far this year.

Firms raised selling prices again with the rate of increase remaining solid, Nikkei said, reflecting efforts to pass on higher costs to their customers.

Aw said survey data also suggested that consumer inflation could remain above 4 percent in May, which will raise expectations for another rate hike in June following one in May.

“Another area of concern is the increasing pressure on Filipino manufacturers’ profit margins,” he warned, noting that PMI data showed firms raising selling prices at a slower rate in May amid rising costs, which suggests that companies may have a threshold as to the extent by which customers can bear higher prices without affecting demand.

One piece of good news is that improving demand conditions permitted firms to share some of the higher costs with their customers, Aw added.

“Survey indicators point to increasing economic activity in the coming months,” he said.

Nikkei also said that business confidence remained elevated and improved during May with the future output index rising from the previous month.

The majority of firms remained confident that product launches, new outlets, higher sales forecasts, promotional activities and increased productivity would drive output growth over the coming 12 months.

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