Manufacturing growth further slowed in February due to TRAIN Law

Higher input prices as well as job losses partly blamed on the new or increased excise tax rates on various goods under the Tax Reform for Acceleration and Inclusion (TRAIN) Law further slowed down manufacturing growth in February, the latest Nikkei Philippines Manufacturing Purchasing Managers’ Index (PMI) showed.

Last month, the seasonally adjusted PMI score further declined to 50.8 from 51.7 in January, global research firm IHS Markit said in a report Thursday.

The reading in February was the second lowest since the survey began in January 2016.

A PMI score of above 50 nonetheless indicates an overall increase in manufacturing activity.

In a separate note to clients, London-based Capital Economics noted that the Philippines “was the only country where the average headline PMI in the first two months of 2018 was below its average for the fourth quarter” of 2017.

Weakest quarter

“Growth in the Philippines manufacturing economy lost further momentum in February, according to the Nikkei PMI data, setting the sector on course for the weakest quarter in the survey history,” IHS Markit principal economist Bernard Aw said in a statement.

“Survey data suggested the new excise taxes, which were implemented at the start of the year, continued to have an adverse impact on demand. While growth in output and new orders picked up from the lows in January, their rates of increase remained well below historical averages. Export sales also weakened further,” Aw said.

Signed by President Duterte in December, Republic Act No. 10963 (the TRAIN Law) starting Jan. 1 this year jacked up or slapped new excise taxes on oil, cigarettes, sugary drinks and vehicles, among other goods, to compensate for the restructured personal income tax regime that raised the tax-exempt cap to an annual salary of P250,000.

“Furthermore, after seeing four months of job gains, staffing numbers fell in February and at the steepest pace in the survey history. The persistent lack of capacity pressure, as indicated by declining backlogs, weighed on hiring,” Aw added.

“However, what’s particularly concerning was the tighter squeeze on profit margins as inflationary pressures built rapidly to survey-record rates. There were reports of layoffs as part of efforts to reduce costs. Firms continued to blame higher excise tax rates and increased commodity prices, especially in oil, plastics and paper, for the sharp cost increase. A weaker peso also worsened the impact of higher import costs,” according to Aw.

Inflation

The peso slid to 12-year lows at the start of the year.

The Bangko Sentral ng Pilipinas expects headline inflation to average 4.3 percent this year and breach the 2-4 percent target range due to the impact on consumer prices of the first tax reform package as well as expected global oil price hikes.

Inflation peaked to an over three-year high of 4 percent last January.

“While the influence of tax reforms is expected to fade in coming months, price pressures could still become more entrenched on rising imported inflation, which will add to calls for the BSP to raise interest rates. In the recent policy meeting, Governor Nestor Espenilla commented that headline inflation is likely to break above the 2-4 percent range target in 2018, but more evidence of rising price trends is necessary before deciding to tighten policy,” Aw said. /lb