Angelo Taningco
Economist, Treasury Group

The Philippine manufacturing sector appears to have expanded at a relatively slow pace in August as per the Nikkei Philippines Manufacturing Purchasing Managers’ Index (PMI), which slipped to its all-time low of 50.6 in August from 52.8 in July. The PMI’s 2.2 point decline in August from July was the second-sharpest month-on-month (mom) drop since the index was introduced in January 2016. Moreover, August was the third-consecutive month that the index went down.

Figure: Nikkei Philippines Manufacturing PMI
Jan. 2016 – Aug. 2017

 
Meanwhile, Nikkei also reported about survey respondents witnessing a buildup in inflationary pressures in August partly induced by the depreciation in the Philippine peso that made imported products, including raw materials, more expensive. This is consistent with our estimates of the peso depreciating by 1.4% in August, and with our forecasts of the headline consumer price index (CPI) inflation rate at 0.2% mom and 3.0% year-on-year (yoy) in the same month.

Nikkei reported that the survey results reveal slower growth in the manufacturing sector’s output and new orders in August partly due to softening in domestic demand for manufactured products. Moreover, new export orders for manufactured items fell during the month amid weak external demand. It added that a shortage in raw materials has also contributed to the slower production growth. As a result, employment in the manufacturing sector fell in August.

The further slippage in the manufacturing PMI bolsters our view of a potential growth moderation for the Philippine economy during the third quarter (Q3) through a growth slowdown in manufactured exports on the demand side and a growth deceleration in the gross value added of the manufacturing sector on the production side. Using the latest merchandise trade and national accounts data of the Philippine Statistics Authority, we calculated the share of manufactured goods exports to total merchandise exports at 85% in the first half (H1) of 2017 and the share of manufacturing sector to gross domestic product (GDP) at 19% in the same period. These figures indicate the relative importance of the manufacturing sector to the Philippine economy.

Notably, the same survey reported by Nikkei reveals elevated optimism from manufacturers, with their positive sentiment geared for the next year. This suggests that the manufacturing PMI could regain its upward momentum in the near future.

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