Economic Update

18 Jun, 2018

Manufacturing has maintained its standing as a key growth driver for the Philippines, with rising domestic consumption and a series of major infrastructure projects lifting expansion in both the sector and broader economy.

GDP grew by 6.8% year-on-year (y-o-y) between January and the end of March, according to the Philippines Statistics Authority (PSA), building on the 6.7% full-year expansion recorded in 2017.

The result was largely driven by the manufacturing sector, which posted growth of 8% in the quarter, and was the largest contributor to GDP at 24.9%.

Within manufacturing, the accounting and computer equipment segment grew by 31.2% y-o-y, followed by increases in communications equipment and apparatus (22.4%), and non-metallic mineral products (16.5%).

Further highlighting the sector’s strong performance, both the Value of Production Index and the Volume of Production Index recorded y-o-y growth of 12.8% and 13.6%, respectively, in March, while the Nikkei Philippines Manufacturing Purchasing Managers’ Index (PMI), a measure of the sector’s performance, jumped to a one-year high of 52.7 in April, the second-highest level in ASEAN, and a significant increase on the 51.5 recorded in March.

Elsewhere in the economy, services increased by 7% in the first quarter, while agriculture edged up by 1.5%.

Domestic demand is primary growth driver

The improved manufacturing performance appears to have been largely driven by domestic demand, with exports of manufactured products falling by 6% y-o-y in March, according to the PSA.

While maintaining its dominance of the Philippines’s export trade, accounting for 84.6% of shipments in value terms, manufacturing exports eased to $4.66bn in March, down from $4.96bn a year earlier.

The result was drawn down by falls in industrial machinery and transport equipment exports (-44.6%), though these declines were offset by a stronger showing from the electronics component, which increased by 6.7% to $2.2bn.

On the domestic front, Nikkei noted that manufacturing had been boosted by increasing demand at the beginning of the second quarter, leading to faster expansion of output as companies took on more workers and purchased more inputs.

Government pushing forward with industrial strategy

The improved performance in manufacturing has come as the government undertakes some major infrastructure and industrial projects.

Chief among these is the $8.4trn ($165.1bn) Build, Build, Build programme, which aims to boost infrastructure development spending from 5.4% of GDP in 2017 to 7.4% in 2022.

The strategy foresees the construction of some 75 flagship projects, including six airports, nine railways, four seaports, and 32 roads and bridges, which are expected to stimulate demand for locally manufactured products.

This has been complemented by the broader Manufacturing Resurgence Programme. The strategy aims to increase the sector’s contribution to GDP to 30% by 2025 and lift manufacturing’s contribution to the workforce from 10% in 2016 to 15% by 2025.

A major part of this approach is the Comprehensive Automotive Resurgence Strategy (CARS). Launched in May 2016 CARS sees the government provide a series of incentives to encourage domestic vehicle production, which is expected to spur growth in the segment, along with the manufacture of chemicals, metalworking, tools, dye, plastics, electronics, rubber, glass and textiles.

In a sign of the rise in demand, automotive sales totalled 196,200 in the first half of last year, a 17.1% increase on the same period in 2016, with the Chamber of Automotive Manufacturers of the Philippines citing well-maintained inventory levels as a key factor behind the growth.

Furthermore, in order to adapt to advancements in modern technology, in May last year the government launched the Inclusive Innovation Industrial Strategy (i3S).

Through further market liberalisation, i3S is designed to improve competition and subsequently innovation in the Philippines’ industrial sector, allowing the country to capitalise on the opportunities presented by increasing globalisation, automation, robotics and artificial intelligence.

Growing capacity to support economic growth

Looking ahead, the increase in manufacturing is expected to be a major factor behind broader economic growth, according to the Asian Development Bank (ADB).

Rising labour productivity and investment in manufacturing and technology are set to boost the capacity of the economy, Ramesh Subramaniam, the ADB’s director-general for South-east Asia, told a press briefing on May 5.

The bank has forecast GDP growth of 6.8% this year and 6.9% in 2019, building on the 6.7% posted in 2017.

While growth is expected to remain strong, the ADB is confident that increased production capacity and investments will be able to match rising demand.

One indicator to support this position is the wholesale inflation figures for March, released by the PSA on May 18. Though the General Wholesale Price Index rose to 5.4%, up on the 4.9% in February, the main manufacturing sub-index only saw a 2.5% increase, suggesting output continues to meet industry demands without significant inflationary pressures.

However, there are concerns that manufacturing could come under increased pressure from inflation later in the year.

Recent falls in the value of the peso, rises in imported fuel prices and new excise tariffs introduced at the beginning of the year should lead to an increase in input costs, which are likely to be passed on to clients. Consumer inflation stood at 4.5% at the end of April, edging up from the 4.3% recorded in March.