IPI records first positive growth since MCO

KUALA LUMPUR: Malaysia’s Industrial Production Index (IPI) recorded a growth of 1.2 per cent year on year (y-o-y) in July – from minus 0.4 per cent in June – marking the first positive growth in production since the MCO took effect.

The improvement of the IPI reading was primarily led by upstream mining, which recorded a growth of minus three per cent y-o-y against minus 17.1 per cent in June. Both crude oil and natural gas production improved sharply by minus 1.2 per cent and minus 4.4 per cent respectively.

While the headline number paints a positive picture, RHB Investment Bank Bhd economist Ahmad Nazmi Idrus said details indicate that the manufacturing sector is still struggling.

“Much of the improvement in July’s IPI is led by a strong rebound in mining production, while manufacturing production posted lower growth. Within manufacturing itself, exportoriented sectors are pulling growth down – in contrast to the stronger data posted by domestic-oriented sectors.

“Nevertheless, the improvement in July’s IPI reading points to a good start for 3Q20F GDP. If the momentum in production remains as it is or improves, we can expect 3Q20 GDP growth to rebound strongly from the minus 17.1 per cent y-o-y seen in 2Q20.

“Overall, we maintain our GDP growth forecast at minus four per cent y-o-y for 2020.”

On a cumulative basis, Affin Hwang Investment Bank Bhd (AffinHwang Capital) saw that growth in Malaysia’s IPI contracted and averaged by minus 7.3 per cent y-o-y fmo January to July this year, compared to 2.9 per cent y-o-y in the same period in 2019.

Manufacturing output averaged a decline of 6.9 per cent y-o-y during the period. Meanwhile, electricity output declined by 5.3 per cent y-o-y in the first seven months of 2020, while mining output declined by 9.5 per cent yo-y in January to July.

“With growth in IPI improving from minus 17.9 per cent in the second quarter of 2020 (2Q20) to 1.2 per cent in July, and steady manufacturing output expansion in 3Q20, we expect Malaysia’s real GDP growth to register a smaller contraction of around minus 1.1 per cent y-o-y in 3Q20,” it said in a report yesterday.

“Improvement in the manufacturing sector has been reflected in the country’s manufacturing PMI, where despite falling below the expansionary level for the first time in two months to 49.3 in August from 50 in July, it was still significantly better than 31.3 in April.”

AffinHwang Capital said the manufacturing PMI showed demand continued to recover, supported by new orders due to gradual reopening of the economy.

“Domestically, we believe economic activity has hit bottom in 2Q20 and will continue to improve from its trough in April 2020, as reflected in labour market conditions, household spending and trade activity,” it continued.

“We expect economic recovery from the second half of the year will be supported by fiscal stimulus measures as well as monetary and financial measures. On top of the earlier stimulus packages, we believe there is still room for targeted fiscal policy initiatives to support the economy, if needed.”

Going forward, the research house expect growth in the manufacturing sector to continue to recover in 2H20, led by the resumption of economic activity under the RMCO phase.

However, external downside risks remain, especially in terms of slower global growth.

“The risk of another wave of Covid-19 may also lead to re-imposition of containment measures which may hinder recovery of global growth. The downside risks from resurgence of the Covid-19 pandemic may hold back manufacturing production across all sectors to the pre-pandemic levels, dragged down by softer external demand as well as manufacturers operating below their maximum capacity due to strict standard operating procedures.

“Nevertheless, our estimates show real GDP growth to likely decline at a gradual pace of around 0.8 per cent y-o-y in 2H20, from minus 8.3 per cent in 1H20, and average around minus 4.5 per cent for fullyear 2020, at the mid-range of the official forecast between minus 3.5 and minus 5.5 per cent, before rebounding to six per cent projected for 2021.”

Much of the improvement in July’s IPI is led by a strong rebound in mining production, while manufacturing production posted lower growth.

Ahmad Nazmi Idrus

— Bernama photo The improvement of the IPI reading was primarily led by upstream mining, which recorded a growth of minus three per cent y-o-y against minus 17.1 per cent in June.