Factory output growth eases with Delta threat seen testing recovery

MANILA, Philippines (Update 1, Aug. 3, 2021, 9:20 a.m.) — Local factories stayed in expansion mode in July but the growth of output eased, with fresh lockdowns in Metro Manila posing a new threat to manufacturers’ delicate recovery.

A monthly survey of 400 companies showed the Philippines' purchasing managers' index (PMI), a measure of factory output, fell to 50.4 in July from 50.8 in the previous month, IHS Markit, a British information provider, reported on Monday.

Despite the “marginal” slide, manufacturing output stayed above the 50 threshold separating growth from contraction. Shreeya Patel, economist for IHS Markit, said both demand and production levels “were still impacted by the pandemic”.

As it is, manufacturers are not out of the woods yet. Factory-gate prices sharply increased in July at a time local demand is still weak, with manufacturers raising selling prices to offset new costs from a fresh value-added tax on some goods. But perhaps the greatest threat to factories at the moment is the spread of highly contagious Delta variant threat, which already triggered another hard lockdown in Metro Manila this month.

"In light of the latest announcement of tightening of restrictions I expect to see a contraction in the PMI," Patel said. " I believe the severity of the downturn won’t be near as sharp as those see in the second quarter of 2020, but with the PMI already fairly low at 50.4 in July I think we can expect another decline should factories suspend their operations."

In its report, IHS said prolonged restrictions continued to weigh on local demand amid a “general reluctance to spend” among consumers. As a result, production levels sagged for the fourth consecutive month, with companies saying they struggled to get new orders.

Lower output also prompted factories to lay off workers for the 17th straight month to reduce operating costs, although the pace of job-shedding in July was the softest in 6 months.

On the bright side, the order slump at home was offset by improving international demand for Filipino manufactured goods, IHS said, as the global economy slowly emerges from lockdowns. A faster vaccine rollout, meanwhile, is making factories bullish for the coming months, with firms continuing to build up their inventory holdings in anticipation of greater demand.

“Domestic demand must improve throughout the second half of the year to help underpin growth in 2021," Patel said.

Editor's note: Added analyst's comments