Philippine Markets Newsletter

MONDAY MACRO: Philippines’ production volume is still experiencing growth, albeit at a slower pace

September 18, 2023

In times of economic slowdown, manufacturers producing consumer goods and durables often face challenges in maintaining their normal output levels.

Let’s take a look at what the country’s production managers think about the economy and where they see growth headed in the near future.

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Manufacturing output contributes about 17% of the Philippine’s Gross Domestic Product (“GDP”). It’s a significant part of the broader economy, but also highly cyclical.

What this means is during periods of economic slowdown, the factory output of manufacturers producing consumer goods and durables tend to struggle the most. Since consumers have less purchasing power during this time, demand for non-essential items weaken.

In order to understand the most recent recession’s impact on the sector, we take a look at the volume of production index (“VoPI”), which measures actual monthly production of manufacturing that is indicative of the state of the economic cycle.

While VoPI reflects the current economic state, one could argue that Purchasing Managers’ Index (“PMI”) is a better metric. The PMI is a leading indicator that tells investors what the purchasing managers are trying to forecast such as the raw materials needs of their organization.

That said, the PMI’s formula itself includes actual output production, influencing purchasing managers’ decisions in terms of future demand for their products. In effect, VoPI and PMI movements are slightly correlated.

VoPI too runs in line with the Value of Production Index (“VaPI”), which measures the change in the monthly production values of manufacturing.

As we see in the chart below, VoPI took a hit when COVID-19 began, reaching negative levels. But in 2021, manufacturing output surged with a vengeance, reaching historic highs of 500% growth before coming back down to pre-pandemic levels in 2022.

This was all a part of an extraordinary time.

To get a better idea of how the manufacturing sector normally fares, we take a look at the growth rate pre-pandemic and post-pandemic.

In 2018, both VoPI and VaPI grew between 10% to 20% for most of the year. However, as inflation pressures persisted in late 2018, manufacturing output also declined. This continued into 2020, at the height of the pandemic.

By April-May 2022, VoPI and VaPI growth returned to the 10%-20% range before the recession and before the initial high inflationary period. The election period had a part to play in the normalization of output and the increase in consumers’ spending power.

Now, both manufacturing growth rates are consistent with their pre-pandemic levels, albeit at a slightly lower level. This implies that while manufacturers are more optimistic about demand for goods improving going forward, they are still being a little cautious about potential near-term downturns, especially with inflation still an issue.

VoPI expanded by 3.4% in June 2023, more than 2x slower than the previous month’s robust 7.7% increase.

Primary drivers that caused the output slowdown were the decline in three industries: food by 3.2%, fabricated metal by 36.4%, and beverages by 13.3%.

Likewise, the VaPI also improved by 3.9% in June 2023, also much lower compared with the preceding month’s 9.9% increase.

This general improvement in manufacturing output can be attributed to the easing inflation trend that reduced the input costs of manufacturers coupled with the decline in major global commodity prices.

This phenomenon resulted in an uptick in domestic demand, consequently supporting the resilience of the Philippines manufacturing sector throughout the specified period.

Finally, the reopening of the economy contributed to speeding up tourism and business activities, leading to more production, sales, and employment within the manufacturing sectors.

About the Philippine Markets Newsletter
“The Monday Macro Report”

When just about anyone can post just about anything online, it gets increasingly difficult for an individual investor to sift through the plethora of information available.

Investors need a tool that will help them cut through any biased or misleading information and dive straight into reliable and useful data.

Every Monday, we publish an interesting chart on the Philippine economy and stock market. We highlight data that investors would normally look at, but through the lens of Uniform Accounting, a powerful tool that gets investors closer to understanding the economic reality of firms.

Understanding what kind of market we are in, what leading indicators we should be looking at, and what market expectations are, will make investing a less monumental task than finding a needle in a haystack.

Hope you’ve found this week’s macro chart interesting and insightful.

Stay tuned for next week’s Monday Macro report!


Angelica Lim
Research Director
Philippine Markets Newsletter
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