Philippine manufacturing shows signs of recovery after 4-month slump

New orders rose for first time since August, though export demand plummeted.

The Philippines' manufacturing sector showed tentative signs of recovery in December, ending the year with a modest improvement in operating conditions after a sharp deterioration the previous month.

The S&P Global Philippines Manufacturing Purchasing Managers' Index (PMI) moved back above the neutral mark of 50.0 in December, rising to 50.2 from 47.4 in November. In contrast to the solid decline observed in the previous month, the latest data signalled a slight improvement in the overall health of the sector. A reading above 50 indicates expansion, whilst below signals contraction.

However, the recovery was fragile and heavily dependent on domestic demand, with export conditions deteriorating sharply.

The year ended with a renewed rise in intakes of new work, ending a three-month period of contraction. The pace of increase was modest but the most pronounced since April, suggesting improved domestic demand conditions.

However, foreign demand for Philippine manufactured goods worsened considerably in December. New export orders fell sharply, the strongest decline in 15 months, weighing heavily on the upturn in total sales.

Whilst the modest rise in new orders led to a softer fall in production levels, it was unable to reverse the downturn. Output fell moderately in December. Moreover, the latest four-month sequence of contraction was the longest since 2021.

However, firms made efforts to raise their capacity in line with higher intakes of new orders. Purchasing activity rose for the first time in three months and at the fastest pace since August. The expansion in input buying enabled firms to better manage their inventory levels. After a sharp depletion in November, holdings of pre-production items were unchanged in December. Additionally, stocks of finished goods rose following a strong decline in November, as firms reportedly built up post-production inventories in anticipation of future demand.

The labour market showed signs of stabilising in December. Although job shedding was recorded for a second month running, the latest fall in employment was weaker than seen in November and fractional overall. Some firms reduced workforce numbers in response to declining production requirements, but others increased staffing levels amid greater new order inflows and anticipations of improving demand conditions in the coming months.

With new orders rising whilst both production and employment remained in contraction, companies experienced a higher volume of requests for goods than they could fulfil. Consequently, backlogs of work increased further in December. The rate of accumulation was marginal and slower than in November, however.

In December, manufacturers reported an increase in average lead times for inputs, reversing the improvement seen in the previous month. Port congestion and adverse weather conditions were cited as contributing factors, though vendor performance deteriorated only slightly.

Operating expenses rose only slightly in December. The latest data signalled the weakest rate of inflation in the current 19-month period of rising costs. Where an increase was noted, firms cited higher material prices driving up input costs.

Meanwhile, the pace of output price inflation accelerated from November, as many firms indicated they passed higher raw material costs on to customers. However, the increase in selling prices remained modest and weaker than the long-run average.

Companies expect output to rise over the course of 2026. Anecdotal evidence reported upcoming projects, the launch of new product lines and business expansion plans. That said, the degree of optimism edged down from November's recent 12-month high.

Maryam Baluch, Economist at S&P Global Market Intelligence, said: "December PMI data signalled a slight improvement in operating conditions in the Philippine manufacturing sector, an encouraging move from the solid deterioration seen in the month prior. New order volumes rose for the first time in four months, which helped partly ease the ongoing downturn in production. Fuelled by this positive direction, companies increased their purchasing activity for the first time since September, whilst the labour market showed signs of stabilising.

"That said, the improvement was tepid across the sector, and its sustainability will largely depend on whether demand can be maintained and further bolstered, bringing growth back to production. Additionally, the sector faces notable headwinds from sharply declining export market conditions, which are limiting the potential for broader expansion. Consequently, at present, the manufacturing sector's growth is primarily being driven by domestic demand, with external markets offering little support."

The data paint a picture of a sector at a crossroads, with domestic demand providing a lifeline but insufficient to fully offset the sharp deterioration in export markets. The sustainability of the recovery will depend heavily on whether domestic momentum can be maintained and export conditions stabilise in early 2026.