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Driving force in manufacturing

Driving force in manufacturing

10 Aug 2021

Stronger IPI with improving global trade scene

The Industrial Production Index (IPI) is set to achieve a stronger growth this year after expanding 12.4% in the first half of the year due to the pick-up in the manufacturing activities, underpinned by improving global trade and the low base effect from last year.

The nation’s IPI declined 4.4% last year from a year ago: its first contraction since 2009.

The index measures the rate of change in the production of industrial commodities in real terms over time for the manufacturing, mining and electricity sectors.

It is measured based on volume changes in production.

Ambank Group chief economist Anthony Dass told Starbiz that support for IPI in 2021 would come from the manufacturing sector, namely the export-led activities that benefit from improving global trade and gross domestic product (GDP).

“Malaysia will continue to benefit from semiconductors, medical related products i.e. rubber products and resource based as well as the rising prices will support the trade and production outlook for petroleum and palm oil-based products.

“However, the upside from export activities will be fairly muted due to the disruption from the standard operating procedures (SOPS) under the movement control order (MCO) 3.0. Contribution from domestic-led activities will also be partly muted from the MCO 3.0 impact,” he noted.

Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid expects the IPI to improve this year.

“The low base recorded last year was the primary reason for the positive growth.

“For the first six months of this year, the IPI has gone up 12.4%.

“Apart from that, manufacturing sector output, especially those in the export-oriented industries, has done well between January and June this year, growing 15.7% in the first six months.

“The sector has been the immediate beneficiaries of the improvement of global demand. This has helped to keep the overall IPI performance on a better footing, at least during the said period,” he said.

Dass cautioned that with no forward clarity on how long the restrictions would remain and how the SOPS would come about after 50% of the contry’s population has been fully vaccinated, it could pose some headwinds to the upside of domestic and export-led manufacturing activities and IPI as a whole.

Greater clarity of SOPS would play a crucial role in boosting the economy, he said, adding the SOPS and restrictions have dented both consumer and investors confidence amid the surging Covid-19 cases and death rates.

Afzanizam said due to the production constraint following the implementation of the MCO, the delay in meeting customer orders could be a costly affair as they might go to other suppliers and might result in higher inventories.

“So it’s about, for example, the manufacturing operational workforce capacity which continues to be capped at 60% by the MCO ruling,” he pointed out.

Meanwhile, MIDF Research is maintaining its full-year IPI growth at 9% this year taking into account the temporary weakness in the middle of the year due to the ongoing tight restrictions on the economy to control the record rise in Covid-19 cases locally.

With more states moving to the second phase of the National Recovery Plan (NRP) the research house expects more businesses to reopen and increase their production activity.

“However, the targeted enhanced MCO imposed in certain localities in Selangor and Kuala Lumpur will depress IPI growth in July as the tighter restrictions also impacted export-oriented factory operations.

“We foresee that production activities will pick up in the later part of the year when more restrictions are lifted,” it said.

RHB Research opined that the July IPI data would surprise on the upside and indicate that the worst of the slow-down in broad economic activity has materialised during the month.

“From our close to real time proprietary data for the Malaysian economy dated end-july, we observe a bottoming out process under way, with a recovery coming as early as August,” the research house said.

For the first half of 2021, the IPI recorded an expansion of 12.4% compared with the similar period of last year.

The increment was influenced by the rise in all components: manufacturing index (15.7%), mining index (4.5%) and electricity index (4.0%).

The IPI rose 1.4% in June 2021 compared with the same month of the previous year.

The growth of IPI in June was underpinned by the expansion of 10.3% in the mining index.

Meanwhile, the manufacturing and electricity indices fell 0.2% and 4.8% respectively.

The manufacturing sector output based on year-on-year comparison decreased by 0.2% in June after recording a growth of 29.8% in May of this year.

The export-oriented industries drove the growth of the manufacturing sector by 8.7% while domestic-oriented industries decreased by 20.8%.

The IPI for the second quarter of the year soared 22.6% against the same period a year ago.

The growth was steered by the manufacturing, mining and electricity indices which increased by 26.3%, 15.1% and 8.6 % respectively.

Source: The Star