Manufacturing to rebound in 4Q on external demand


THE supply chain problems in various industries like technology and automotive manufacturing suggest Malaysia’s manufacturing sector remains in a difficult position in the third quarter (3Q) due to the escalation in Covid-19 cases in the country, but positive growth is expected towards the end of the year supported by export demand.

IHS Markit Asia-Pacific chief economist Rajiv Biswas said the rising Covid-19 Delta variant wave that has spread to Malaysia in recent months has impacted industrial output as well as consumer spending.

The latest IHS Markit Malaysia Manufacturing Purchasing Managers’ Index (PMI) at 40.1 in July remained well below the 50 level that indicates neutral operating conditions.

Biswas said the latest PMI reading points to continued contraction in Malaysia’s manufacturing operating conditions in the 3Q as demand and supply chains were dampened by the recent rise in infections and by the various lockdown measures enforced.

“Due to the continued escalation in Covid-19 cases in Malaysia during August, the near-term outlook for the manufacturing sector remains difficult. However, the rapid rollout of Covid-19 vaccinations in recent months has been an important favourable factor, with the share of the Malaysian population that have received their first dose vaccination having already reached 53% by mid-August.

“If this results in a gradual decline in the latest Covid-19 wave, it could result in a gradual easing of lockdown conditions, allowing improving industrial production and consumption spending,” he told The Malaysian Reserve (TMR).

He said the local manufacturing sector has benefitted from the recovery in major export markets like the US, China and the European Union.

Exports rose 30.2% year-on-year (YoY) in the first half of 2021 (1H21), with exports of manufactured goods up by 32.6% YoY.

With the accelerated rollout of the vaccination programme in Malaysia, the outlook for the 4Q and 2022 is for a gradual recovery as domestic economic activity rebounds, he added.

Biswas said Malaysia’s GDP for 2022 is expected to grow 6.3% as domestic demand recovers with more normal operating conditions.

Bank Negara Malaysia (BNM) revised down its GDP growth forecast for Malaysia to between 3% and 4% for 2021, from its previous projection of between 6% and 7.5%, due to the impact from the resurgence in virus cases.

On a seasonally adjusted quarterly basis, Malaysia’s GDP is expected to trough in the 3Q before returning to pre-pandemic levels in the 4Q, BNM governor Datuk Nor Shamsiah Mohd Yunus said in a recent briefing.

MIDF Research economist Abdul Mui’zz Morhalim told TMR the country’s manufacturing sector is supported by the strong growth in external demand and as a result of involvement in the global and regional supply chains.

Despite the weak overall demand reflected in July’s PMI, Abdul Mui’zz said there are still pockets of new orders from US and Europe, as well as stabilisation in manufacturing employment after three months of decline.

“The strong global demand for the electrical and electronics (E&E) and technology products, in particular, will be crucial to support the local manufacturing sector’s outlook as recent data shows the increase in E&E output helped to sustain positive growth in Malaysia’s overall IPI (Industrial Production Index) in June 2021.”

He said there are still several factors that could hinder the sector’s growth, namely the weakness in domestic consumption, supply constraints, an increase in production costs and a slowdown in global growth.

While wage levels in sectors like manufacturing have started to rise after falling last year, domestic consumption may remain below potential due to the tighter restrictions on mobility during lockdown.

Supply constraints have affected the performance of the automotive industry as the global chip shortages led to the weak output of Malaysia’s motor vehicles in recent months.

The shortage of materials had led to a rise in input prices which translated into higher production costs and posed a challenge to manufacturers as highlighted by them in recent PMI surveys.

The sharper than expected moderation in China’s July numbers and the spikes in Covid-19 cases in places like Japan and Australia are worrying as these could weaken the recovery momentum if lockdowns are introduced and sustained over a long period.