A crucial indicator for gauging a country’s economic activity level is the capacity indicator. It reveals the extent to which the country is operating in relation to its full potential.

By assessing capacity utilization, we gain valuable insights into the efficiency and performance of the economy. Today, let us see how the Philippines is doing for this metric.

Philippine Markets Newsletter:
The Monday Macro Report
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When a manufacturing company operates at a high capacity utilization rate, it indicates a robust and vibrant production process, with both machines and workers operating at peak efficiency to meet the surging demand for products.

This heightened productivity is often a result of increased consumer spending, as individuals possess sufficient disposable income, leading to a notable rise in purchasing activities.

Conversely, a low capacity utilization rate suggests a deceleration in production. The factory is not fully leveraging its potential, which could be due to diminished consumer purchases caused by financial constraints or uncertainties surrounding the economy.

As a result, the factory adjusts its operational pace to align with the reduced demand for its products.

Capacity utilization serves as a valuable economic indicator as it provides insights into the overall health of the economy.

A high rate implies strong demand for goods and services, with businesses striving to meet consumers’ needs. On the other hand, a low rate indicates weaker demand, potentially driven by reduced consumer spending or economic challenges.

Between 2001 and 2019, the average capacity utilization rate in the Philippines was 81%. However, the outbreak of the coronavirus and subsequent lockdown measures caused a significant decline in consumer demand, leading to a massive drop to 46% in April 2020.

Since then, the capacity utilization rate has gradually recovered and now stands at 72.4% as of April of this year. Although it is still relatively marginally far from its two-decade average, the rate suggests that the Philippines is still in the post-pandemic recovery phase.

In addition, significant declines in capacity utilization serve as a lagging indicator of an impending recession. It suggests that future capital expenditure is likely to be restrained, and also indicates the likelihood of lower inflation in the future due to economic slack.

As observed in the chart, no substantial declines have occurred in the past year and a half. This observation aligns with other positive economic indicators, affirming the resilience and potential for further growth and recovery for the Philippine economy.

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!

Regards,

Angelica Lim
Research Director
Philippine Markets Newsletter
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