Factory activity likely to continue expanding in next few months

By Justine Irish D. Tabile, Senior Reporter

PHILIPPINE manufacturing activity is expected to continue expanding in the next few months amid easing oil prices, although economists warned the looming El Niño, renewed Middle East tensions and rising labor costs could slow growth momentum.

“We see further manufacturing condition improvements in the coming months as softer global oil prices allow firms to normalize operations,” University of Asia and the Pacific economist Marco Antonio C. Agonia told BusinessWorld via e-mail.

Mr. Agonia pointed to the latest S&P Global Philippines Manufacturing Purchasing Managers’ Index (PMI) data showing that firms are continuing to ramp up manufacturing and purchasing activities as pre-oil crisis inventories have already been depleted.

The Philippines’ PMI reading slightly improved to 50.9 in June from 50.8 in May, marking a second straight month of expansion in factory activity. A PMI reading above 50 indicates improving operating conditions, while a reading below 50 signals contraction.

Mr. Agonia said he expects some improvement in manufacturing activity “as the expected second-half rebound stimulates business and household confidence.”

He noted that the oil refining and consumer goods manufacturing sectors will likely drive factory activity in the coming months.

“Assuming no further significant shocks to the economy, consumers will likely reorient budgets towards the usual fourth-quarter holiday rush and manufacturers can go on with raw material purchasing,” he said.

“Price effects from still-elevated domestic pump prices will also incentivize more refining activity.”

However, Mr. Agonia said headwinds in the form of renewed Middle East tensions and the looming super El Niño weather event may dampen recovery.

The Philippine Atmospheric, Geophysical and Astronomical Services Administration earlier said that the country may encounter a “strong” El Niño season from September to November, which could intensify into a “very strong” one starting October.

“The upcoming El Niño season may drag manufacturing sector growth if it proves to be severe,” said Mr. Agonia. “Extreme weather events can damage agro-industry supply chains, especially for manufacturing categories with direct inputs from the agricultural sector.”

Citing the 1998 El Niño episode, he said both the agriculture and industry sectors posted annual declines.

Meanwhile, the conflict in the Middle East, which began in late February, remains unresolved. Earlier this week, the US military began fresh strikes near the Strait of Hormuz and coastal areas in Iran.

Iran has again closed the Strait of Hormuz, where a fifth of global oil and gas shipments pass through, raising fears of further supply disruptions that will drive up prices.

The Philippines is under a one-year state of national energy emergency until March 2027, as soaring global oil prices dampen economic activity.

Reyes Tacandong & Co. Senior Adviser Jonathan L. Ravelas said manufacturing activity will remain in expansion territory in the coming months, supported by easing inflation, resilient consumer spending, infrastructure projects and improving business sentiment.

“Domestic demand should continue to be the primary growth engine, particularly for food and beverage, consumer goods, and construction-related industries,” Mr. Ravelas told BusinessWorld via Viber.

However, he said softer global demand, trade uncertainties, geopolitical tensions and volatile energy costs could moderate the pace of growth.

“Overall, the outlook is cautiously optimistic, with the sector likely to grow steadily as long as domestic demand remains healthy and policy conditions remain supportive,” he added.

However, Ateneo de Manila University economist Leonardo A. Lanzona, Jr. cautioned against reading too much into the latest PMI data, noting that the June expansion remained modest.

“Given the reading is barely above the 50 line, still-soft export orders, and cautious forward expectations, I’d treat June as tentative stabilization rather than a growth trend you can bank on for the third quarter,” he told BusinessWorld via e-mail.

Mr. Lanzona said manufacturing remains “improving but fragile,” particularly as the recently approved dual-tranche P85 wage hike in the National Capital Region (NCR) and persistent core inflation continue to pressure production costs.

The minimum daily wage in NCR will increase by P60 on July 25, and by P25 in January 2027.

In June, core inflation, which discounts volatile fuel and food prices, quickened to a 31-month high of 4.4% in June. This despite headline inflation easing to 6.4% from 6.8% in May.

Mr. Lanzona’s concerns were reflected in the slower pace of factory output growth in May. Preliminary data from the Philippine Statistics Authority showed manufacturing output, as measured by the volume of production index, grew by 10.2% year on year in May amid weaker output of transport equipment, food products and chemicals.

Although this marked a reversal from the 0.3% contraction recorded in the same month a year earlier, it was slower than the revised 11.7% growth posted in April.