Russia-Ukraine conflict will affect E&E sector growth, inflation

The prolonged war is will affect the supply chain causing a spike in chip prices 


THE Socio-Economic Research Centre (SERC) revised its exports growth estimate for Malaysia in 2022 to 5.9% from 1.8% previously due to continued external demand for electronics and electrical (E&E) products, rubber and wood products, as well as higher commodity and crude oil prices. 

The estimate, however, is still lower than Bank Negara Malaysia’s (BNM) estimate of 10.9% growth. 

Read more: Malaysia’s palm oil can benefit from Ukraine-Russia crisis

SERC ED Lee Heng Guie expects the manufacturing sector to grow at a moderate pace of 4.8% this year backed by the demand for E&E products and recovery in domestic industries but labour shortage and supply disruptions would dampen the sector’s expansion. 

“Everyone expected the prolonged supply chain disruption due to Covid-19 would ease by June this year but the latest Russia-Ukraine war has an effect on the supply chain and the shortage of semiconductor chips is likely to be further disrupted by the prolonged war. 

“With this prolonged supply disruption, higher prices of raw materials, shipping rates and worker shortage, they could potentially impact the global chip capacity, hence, could cause a spike in chip prices. 

“Malaysia contributes at least 7% of global semiconductor supply. With this, it means our E&E sector will continue to expand but may increase at a smaller rate,” Lee said in an online press briefing yesterday.

On the issue of lockdowns currently in some parts of China due to the Covid-19 virus spread, Lee said a decline in China’s GDP due to the movement restriction would have an impact on Malaysia’s economy through trade or tourism related channels. 

Read more: Delays at local ports manageable amid Shanghai lockdown

China was Malaysia’s largest external trade partner since 2009 where export shares were close to 15% while imports were 21%. 

“Based on our sensitivity study, a 1% decline in China’s GDP could hit Malaysia between 0.3 and 0.5 percentage points in terms of total economy whether it is in trade or tourism. 

“We have opened our borders but if Chinese tourists do not come back in a big way, I believe the anticipated rebound in the tourism-related industries would be somewhat smaller compared to pre-pandemic levels,” he said. 

The centre also projected Malaysia’s headline inflation to increase to between 3% and 3.5% this year, higher than BNM’s projection of between 2.2% and 3.2%. 

Read more: Russia-Ukraine war would lead to stronger margins in O&G sector

Headline inflation moderated for the third month to 2.2% year-on-year (YoY) in February versus 2.3% in January due to slower transportation inflation. 

It noted that food and non-alcoholic beverage price inflation accelerated to more than four-year high of 3.7% from 3.6% in January, due to higher food inflation at home and food away from home, while recreation services and culture price inflation also rose to 1.6% from 1.2% in January, reflecting the reopening of economic and social activities. 

Core inflation paced higher to 1.8% in February from 1.6% in January. Core inflation includes all goods and services except for volatile items of fresh food and government-controlled prices 

Continued increases in cost of production, as measured by Producer Price Index, which was up 9.7% YoY in February, could result in some pass-through of increased costs onto consumer inflation ahead, the research institute noted. 

The sustained high global crude oil prices and non-energy commodity prices remain a wild card amid the implementation timing of the fuel subsidy rationalisation.