Industrial output set for rebound as virus slows

Analysts expect domestic and export orders to gradually recover with most businesses having reopened in May


MALAYSIA’S industrial output is expected to show signs of a V-shaped recovery in the second half (2H) of the year as countries globally begin to emerge from lockdowns amid signs the Covid-19 pandemic is ebbing.

With most businesses having reopened in May since the partial coronavirus lockdown began on March 18, analysts expect both the domestic and export orders to gradually recover as reflected in China’s economic rebound in April.

IHS Markit Ltd Asia-Pacific chief economist Rajiv Biswas estimates industrial production growth to return to positive territory over the next six months at a modest rate of 2% year-on-year due to relatively gradual pace of recovery in world demand for Malaysian exports.

“The pace of recovery in industrial output is expected to be mixed,” Biswas told The Malaysian Reserve.

In the mining sector, exports of energy products will be constrained by excess supply conditions in world oil markets, but will see moderate recovery in oil and gas prices, he said.

In the manufacturing sector, production of medical equipment is expected to perform strongly due to the impact of the pandemic on both domestic and global demand for healthcare-related products.

The food and beverage (F&B) sector is also expected to be highly resilient to negative shocks from the pandemic, with food stores having remained open worldwide throughout lockdowns, and demand for F&B products by restaurants set to recover as lockdowns end, Biswas added.

Demand for electrical and electronics equipment is, however, expected to recover at a measured pace amid protracted global lockdowns and large-scale job losses across many major economies.

“This will result in a relatively moderate and extended pace of recovery in world consumer demand over 2H20 and in 2021,” he said.

In March, Malaysia’s Industrial Production Index fell by a record 4.9% — the steepest decline in a decade — as curbs imposed to slow the spread of the coronavirus brought the economy to a near halt. The index measures factory output from the manufacturing, mining and electricity generation sectors.

All three main sectors tracked by the index posted declines in March, with electricity output falling 7% from a year earlier, while manufacturing and mining output were down 4.2% and 6.5% respectively.

In the first quarter of 2020, the country’s GDP beat expectations to grow 0.7% from a year earlier but will likely contract in the April-June period.

Bank Negara Malaysia forecasts the economy to shrink by 2% or grow up to 0.5% this year due to the pandemic.

Axicorp Financial Services Pte Ltd chief global markets strategist Stephen Innes expects orderbooks to snap back to levels seen when Asia emerged from the global financial crisis boosted by a massive policy tailwind.

“For the most part, consumers should return to normal pretty quickly, and manufacturing activity will have to ramp up to keep up with demand. It may not happen immediately, but looking at China’s new car sales and the amount of driving happening globally as economies reopen, it suggests to me that consumers are not as fearful as everyone is making out,” Innes said.

Auto sales in China grew in April for the first time in nearly two years, driven by strong demand for commercial vehicles which soared more than 30%.

Sales increased 4.4% in April compared to the same month the year prior to just over two million vehicles, according to data published by the China Association of Automobile Manufacturers.

“We should get a better picture in June and July when mobility restrictions including travel bans get removed, but I feel pretty optimistic that business will spring back to life,” Innes said.