After a stellar performance in 2017, the country’s manufacturing sector showed signs of slowing down at the beginning of the year based on the purchasing managers’ index (PMI) report for January, attributed mainly to the impact of the newly implemented Tax Reform for Acceleration and Inclusion (TRAIN) Act.
Global research firm IHS Markit released on Thursday the overall Nikkei PMI of the Philippines for January, showing a significant drop to an index of 51.7 during the month from 54.2 last December.
“While the Philippines’s manufacturing economy ended last year on a high, it started 2018 on a more modest note, as demand was partially hurt by the new excise taxes, according to the Nikkei Philippines Manufacturing PMI,” IHS Markit Principal Economist Bernard Aw said.
The PMI is a composite index, calculated as a weighted average of five individual subcomponents. Readings above 50 signal an improvement in business conditions, while readings below 50 show deterioration.
The components include new orders—which weigh the most at 30 percent of the index; output—at 25 percent of the index; employment—at 20 percent; suppliers’ delivery times—15 percent; and stocks of purchases—comprising the other 10 percent.
The report reflected slower growth in both output and new orders during the month, as well as the weakest rise in employment growth since early-2017.
“Weaker client demand and a persistent lack of capacity pressure weighed on hiring. Furthermore, inflationary pressures intensified, with higher costs having an adverse impact on purchasing activity,” the report read.
“Buying levels increased at a markedly slower pace, which partially led to a smaller build in input inventories, while postproduction stocks fell for the first time in four months,” it added.
Despite the bleaker picture, business confidence in the country’s manufacturing sector remained elevated for the near term, indicating a possible pick up of activity in the coming months.
“…other survey indicators suggest that firms are likely to look past the near-term slowdown toward stronger growth in the year ahead. The future output index remained elevated, with a majority of panel-respondents anticipating higher production over the next 12 months,” Aw said.
The report also noted that the modest improvement in the January PMI was a contrast to the solid expansions in recent months. The latest reading was the third lowest in the survey history.
Aw expressed concern that the higher price pressures could potentially pose a downside risk to growth of the sector.
“Survey data showed input costs increasing sharply and at one of the fastest rates in the survey history, pushing Filipino manufacturers to raise selling prices at a record pace,” Aw said. “Given the strong relationship between PMI’s gauge of input prices and official consumer inflation data, we could see stronger consumer price pressures in early-2018,” he added.
The TRAIN Act, the first tranche of the Duterte administration’s tax-reform program, was implemented on January 1.
Image credits: Nonie Reyes