Monday, June 24, 2024

DIGITAL INFLUENCER | Sustained economic growth amid marginal slowdown

The Purchasing Managers’ Index (PMI) for the Philippines in April 2024 indicates a continuing trend of expansion, although some indicators suggest a marginal slowdown from previous months.

Managed by the Philippine Institute for Supply Management (PISM) and its advocacy arm, the Foundation of the Society of Fellows in Supply Management (SOFSM), along with I-Metrics Asia-Pacific Corporation, the PMI provides vital insights into business conditions and economic trends across the manufacturing, services, and retail/wholesale sectors.

Here are some of the findings. I also included observations from various developments noted to date.

Overall PMI Index

The composite PMI for April 2024 remained above the threshold mark of 50, which indicates growth in the economic activities covered by the index. However, it experienced a slight decrease compared to previous months, reflecting a slowing pace in some sectors.

Manufacturing

While still in the expansion territory, the manufacturing sector has shown signs of slowing growth. This deceleration needs careful monitoring as it reflects broader economic trends, including global demand and supply chain issues.

Manufacturing sectors are grappling with longer delivery times, which can complicate production schedules and increase operational costs. This scenario often reflects broader global supply chain issues such as logistical bottlenecks or geopolitical tensions affecting trade routes.

Production costs in the manufacturing sector showed variability, partly due to fluctuations in raw material prices on the global market. For some industries, like electronics and automotive, costs were driven by semiconductor price trends and metal prices, respectively.

Employment in the manufacturing sector saw modest gains, likely driven by an increase in production demand and stabilization in global supply chains. However, the growth rate in employment was not uniform across all manufacturing industries.

Services

The services sector also showed continued expansion, although at a slower pace compared to the robust growth seen in the early months of 2024. This slowdown could be attributed to reduced new orders and employment rates which did not pick up significantly.

The services sector saw a rise in operating costs, driven by higher wages and rental costs, reflecting a post-pandemic recovery in commercial real estate and labor markets.

The services sector, particularly IT and business process outsourcing (BPO), continued to be a strong driver of employment growth. There was also notable job creation in healthcare and education, reflecting ongoing demand for these services.

Retail and Wholesale Recovery

This sector saw a rebound in April, recovering from earlier contractions. The improvement was supported by a gradual increase in consumer spending and inventory restocking by businesses.

The sector has experienced a decrease in lead time, indicating faster supplier deliveries, which could be attributed to improved supply chain management or reduced demand pressures.

Retail sectors faced challenges with fluctuating costs, particularly in food and consumer goods, influenced by both domestic agricultural output and import prices. There was a noted increase in promotional activities to maintain sales volumes despite higher prices.

Employment in retail and wholesale sectors improved slightly, supported by a rebound in consumer spending and the normalization of economic activities.

Employment Growth Concerns

Employment levels across the sectors showed mixed results; while there were gains in some areas, overall employment growth was subdued, reflecting caution among businesses regarding long-term commitments. This could indicate that businesses are still hesitant to commit to new hires due to lingering economic uncertainties.

Despite the growth in job numbers, there were concerns about the quality of employment, such as the prevalence of contractual jobs and part-time positions that do not offer long-term security or benefits. This aspect remains a critical area for policy intervention.

A persistent issue highlighted was the skills mismatch between job seekers and the requirements of available jobs, especially in high-tech and emerging sectors. There is a growing need for enhanced vocational training and education programs to align the workforce’s skills with industry needs.

Although there was an overall improvement in employment rates, underemployment remained a challenge, indicating that many workers were not fully utilized or were working in jobs below their skill level. This underutilization suggests that economic growth is not yet robust enough to fully engage the available labor force.

Supply Chain Resilience

Despite challenges, there was a noteworthy resilience in the supply chains across sectors, likely bolstered by strategic adjustments such as diversifying supply sources, investing in logistics technologies, and adapting to new consumer demand patterns post-pandemic.

Different sectors employed unique strategies to cope with the evolving challenges. For instance, manufacturing might have increased their safety stock levels, while retail possibly leveraged just-in-time delivery models to reduce inventory costs and respond quicker to consumer needs.

Energy costs, particularly for oil and electricity, continued to be a significant factor. Variations in global oil prices directly influenced transportation and production costs across all sectors, highlighting the ongoing vulnerability to external energy market shocks.

Inflation and Moderation in Price Increases

Input costs continued to rise, but the rate of price increases for final goods and services moderated, suggesting that businesses were absorbing some cost pressures to maintain competitive pricing.

The Philippine peso’s exchange rate against major currencies had a direct impact on import costs, affecting sectors reliant on imports for raw materials or finished goods. A weaker peso increased import costs, contributing to inflation in these sectors.

Supply chain disruptions, while less severe than in previous years, still contributed to cost adjustments. Logistics costs remained elevated, although there was a gradual stabilization as global shipping and freight conditions improved.

External Vulnerabilities

The Philippine economy’s exposure to external shocks — be it from global economic slowdowns, trade disruptions, or geopolitical tensions — remains a concern, as evidenced by the impact on export-oriented manufacturing sectors.

New Orders and Business Activity

New orders growth slowed slightly, indicating a cautious approach from clients amidst uncertain economic forecasts. Business activity mirrored this trend, maintaining expansion but at a reduced pace.

Business Outlook

Business confidence remained positive, but cautious, reflecting optimism about future business conditions tempered by uncertainties surrounding global economic recovery and domestic policy directions. This sentiment could potentially lead to reduced investments and slower decision-making processes, impacting longer-term growth prospects.

Moving Forward

Given these observations, there is a need for targeted policy interventions to support sectors showing signs of slowing growth, particularly manufacturing.

Moreover, enhancing employment opportunities through stimulus measures or incentives for businesses could help in converting economic expansion into more widespread economic benefits. Maintaining vigilance on inflationary pressures and external risks will also be crucial in ensuring that the growth trajectory remains sustainable.

The observed trends underscore the importance of continuous investment in supply chain infrastructure and technology. Policies aimed at enhancing port efficiencies, reducing bureaucratic red tape in customs, and incentivizing technological upgrades in logistics could be beneficial.

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