Industrial output rebound — a signal for recovery in 2H20

The partial lifting of lockdown restrictions enables factory operations to resume at full capacity, leading to an increase in client demand, report says


MALAYSIA’S industrial output rebound in June has offered fresh hope of a better second half this year (2H20) as restrictive measures imposed to curb Covid-19 infections continue to be lifted.

The headline IHS Markit Ltd’s Malaysia manufacturing Purchasing Managers’ Index (PMI) rose sharply to 51 in June from 45.6 in May, with production lines restarting for the first time since mid-March. PMI readings above 50 indicate expansion.

The partial lifting of lockdown restrictions enabled factory operations to resume, leading to an increase in client demand, IHS Markit said in a report yesterday.

Several firms highlighted their operating rates had risen to clear backlogs which had accumulated during factory closures.

Such a rapid turnaround in production since the severe collapse at 31.3 in April bodes well for a V-shaped recovery, IHS Markit chief business economist Chris Williamson said.

However, a sustained recovery is by (no) means assured, and growth could easily lose momentum after the initial rebound.

“While business expectations continued to improve in June, confidence remains well below levels seen at the start of the year, in part reflecting worries about the impact of ongoing Covid-19 restrictions on demand, both locally and abroad,” Williamson said.

“Weak export demand remains a particular concern, especially in terms of subdued consumer spending. For now, the data are moving strongly in the right direction and, barring any second waves of infections, recovery is evident.”

While overall manufacturing demand recovered at a fast clip, overseas demand remained fragile, dragging total orderbook volumes.

International market demand was reportedly subdued by the ongoing pandemic, although the decline in new export sales has eased considerably since April.

OCBC (M) Bank Bhd economist Wellian Wiranto said the reading in June signals a period where manufacturers can breathe easily again, as most respondents foresee a better outlook.

“To be sure, the outlook remains tinged with uncertainties on the global end-demand front, but at least the bottoming-out process has begun,” he told The Malaysian Reserve.

Other major Asian economies, including South Korea, Taiwan and Indonesia, also witnessed an uptick in their PMI readings for June though many remain below the 50-point threshold. Malaysia and Vietnam joined China in having PMI readings in expansionary zones, Wiranto said.

The latest survey data by IHS Markit recorded broadly neutral levels of outstanding work across the Malaysian manufacturing sector, suggesting operations were being effectively run to match business requirements.

Consequently, staffing levels were held nearly stable. Some companies moved in retrenchment mode as businesses adjusted to new production schedules.

A focus on efficiency was also seen in the survey data for purchasing activities and inventories. Buying levels were reduced in June, while pre- and post-production inventories fell as businesses managed production to meet demand.

Meanwhile, local manufacturers continued to report slower input lead times in June, IHS Markit said. Transport restrictions relating to the Covid-19 pandemic exerted further pressure on vendors.

There were also reports of suppliers facing large backlogs following the easing of some lockdown measures.

Prices also moved into inflation territory last month as input costs rose amid stock shortages, higher transport fees and unfavourable exchange rate movements. Output prices were subsequently increased for the first time this year.