Manufacturing is poised for an improvement in the near term after persistent contraction through August.
Stockbroker SB Equities said as the country transitions to a more sustained and less restrictive general community quarantine (GCQ) this month, and given an ongoing global manufacturing recovery, the Philippines could see improvements in its manufacturing and overall economic activity over the near term.
The IHS Markit Philippine Purchasing Managers’ Index (PMI) last month August hit a three-month low due to increased restriction of the quarantine measures in most of Luzon for half of the month. The PMI fell to 47.3 last month compared to July’s 48.4, posting a below 50 index which signals a contraction.
SB Equities said there is a “high degree of positive correlation” between the quarterly average manufacturing Philippine manufacturing index (PMI) and quarterly GDP growth for the Philippines and four other Asean economies—Indonesia, Malaysia, Thailand and Vietnam. A group correlation coefficient of 0.76 suggests that the peers of these developing economies relatively track the direction of each other’s manufacturing sector.
SB Equities said indeces in Indonesia and Myanmar have been improving to expansionary mode and Malaysia while Thailand and Vietnam, like the Philippines are still in a contraction phase.
SB Equities said the month-on-month decline in the Philippines’ can be attributed to the two- week modified enhanced community quarantine (MECQ) imposed in the National Capital Region (NCR), three provinces in Calabarzon and one province in Central Luzon between August 4 and 18.
It said these regions serve as the country’s major manufacturing hubs with a combined share to the country’s industrial output of at least 60 percent — Calabarzon (28 percent share), NCR (19 percent), and Central Luzon (14 percent) — per 2018 regional data from the Philippine Statistics Authority.
“Hence, the shift to a more stringent MECQ in the three regions have had a substantial negative impact on manufacturing activity,” SB Equities said.
“We also find a statistically significant positive relation between PMI and GDP growth, similar in other countries such as US and China,” it said.
SB Equities said global manufacturing activity continued to gather steam as the JP Morgan Global Manufacturing PMI climbed to a 21-month high of 51.8 in August, its second-straight month that it went above 50, which denotes manufacturing output expansion.