Sunday, May 9

Industrial production to continue to slow in 1H21


KUCHING: The expected softening in the first half of 2021 (1H21) headline Industrial Production Index (IPI) numbers are likely to be exacerbated by the weakness seen on the external front, analysts opine, but others also note that IPI will rebound by 6.3 per cent this year.

According to RHB Investment Bank Bhd (RHB Investment), the strong growth in the export-oriented industries are likely to moderate temporarily, amid the slowdown in global supply chain following acute shortage of semiconductors.

“While we believe the production of domestic semiconductors may continue to remain high, other ancillary production could start to soften as factories around the world operate at below capacity,” RHB Investment said.

“The slowdown seems most acute in light vehicle manufacturing. Data on China manufacturing activity through satellite images have shown that activities are slowing down in early February although rebounded partially in early March.

“We suspect the issue to be temporary to within a few months as semiconductor companies ramp up production.”

RHB Investment highlighted that on the domestic front, the easing of the second Movement Control Order (MCO2.0) restrictions recently is expected to improve the demand for domestic goods and lead to some partial recovery, especially in food & beverages.

Despite that, the research firm still expected the segment to remain weak considering the major impediment to recovery still remains in place.

“Domestic economic indicator such as unemployment rose higher in January at 4.9 per cent from 4.8 per cent in December, while retail sales contracted further at -2.5 per cent in January from -2 per cent previously.”

RHB Investment’s view remained in line with the recent Purchasing Managers’ Index (PMI) data for February which shows larger contraction in activity with a reading of 47.7 from 48.9 in January.

“The PMI report stated that businesses continued to scale back production, while incoming orders also moderated.”

Meanwhile, the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) projected that the recovery in production activity this year will support the IPI to rebound by 6.3 per cent this year, compared to -4.2 per cent in 2020.

“The latest data in January 2021 suggests that the impact from MCO 2.0 in the latter half of the month was minimal, but we foresee the sequential slowdown in industrial production to continue in February 2021, as indicated by the further decline Malaysia’s manufacturing PMI,” MIDF Research said.

“Clusters found in the workplace could have hurt production activity for the affected factories and firms.”

On another note, the research arm highlighted that weaker demand condition could also hurt domestic-oriented output as MCO 2.0 had been extended through February 2021.

“However, the easing of restrictions that allow more companies to reopen will somewhat mitigate the impact of MCO 2.0 on business activity.

“Sustained growth in the external demand will continue to support the production outlook for trade-oriented industries, given the strong demand for electrical and electronics (E&E) and rubber products and better economic prospects for major trading partners such as the US and China.”

Going forward, MIDF Research expected production to continue recovering as sentiment improved following the rollout of the Covid-19 vaccination programmes in Malaysia and in other countries.