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Industrial production on recovery

Industrial production on recovery

12 Feb 2024

The manufacturing sector may have bottomed out with the improvement in January signalling the start of a gradual recovery in Malaysia’s overall industrial production, industry observers said.

They said the country’s Industrial Production Index (IPI) is expected to gradually improve in the upcoming months, driven by semiconductor sales and a favourable comparison base.

Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid believes that the IPI will gradually improve, especially for semiconductor-related products, as this year’s global semiconductor sales are expected to increase by 13.1 per cent. 

However, he noted that the main factor dragging the IPI down in December 2023 is the manufacturing sector, which accounted for the lion’s share of 68.25 per cent of the total IPI.

“The manufacturing sector output fell 1.4 per cent year-on-year (YoY) in December (Nov: -0.1 per cent) with export-oriented industries (45.8 per cent of total IPI) declined 4.1 per cent from 2.7 per cent drop and it has been on negative print for seven months in a row.

“This shows that weak global demand has taken a toll on the IPI,” he told Business Times.

Going forward, Afzanizam said the risks for Malaysia’s IPI performance hinge upon the potential decline in global gross domestic product (GDP) and the risk of recession in the global economy, especially in major economies.

He said it seems that China is struggling to sustain its growth with deflationary risks have been growing given the recent the negative consumer price index (CPI) print which has been an ongoing affair for four consecutive months. 

“Not to mention disruption is supply chains following the heightened geopolitical risks. So, risks to lower IPI is very externally driven.  I believe that some strategies that Malaysia can adopt to boost its IPI performance include promoting domestic growth. 

“Therefore, implementing the 2024 Budget initiatives as soon as possible is crucial to offset weaknesses from abroad,” he added.

Echoing similar views, Tradeview Capital fund manager Neoh Jia Man believes that the IPI performance will gradually pick up towards the end of 2024, thanks to a low comparison base. 

The improvement in January’s manufacturing PMI also indicates that the manufacturing sector might have bottomed, he added.

“The recent decline in Dec 2023 IPI was due to lower manufacturing production, which was widely believed to be the result of waning export demand. 

“The figure was below consensus expectation and does not bode well for the outlook of Malaysia export-oriented counters, particularly those in the electrical and electronics, as well as petroleum and chemical products industries,” he noted.

Nevertheless, Neoh opined that the upcoming US presidential election could potentially pose challenges to Malaysian industrial players if there are any changes in US trade policy, alongside the persistent external headwinds arising from a weak Chinese economy. 

However, he believes that the New Industrial Masterplan 2030, launched by the Malaysian government last year, has already laid out the necessary routes toward strengthening the competitiveness of our nation’s manufacturing prowess. 

“Nonetheless, execution remains the key variable that will determine its success,” he said.

Meanwhile, KAF Investment Bank Bhd said looking ahead, ongoing robust domestic demand and a steady recovery in global demand is expected to lift industrial activities from its current low levels. 

The firm noted that the S&P Global Malaysia Manufacturing PMI, an early gauge of manufacturing performance, rose to a 16-month high of 49.0 in January 2024 (December 2023: 47.9), with the moderation in output, new orders and exports easing. 

“Overall, manufacturers’ sentiment in Malaysia has improved slightly from December, signalling that the worst of the slowdown seen in 2023 has passed,” it said in a note.

Likewise, Kenanga Research expects the manufacturing sector’s recovery to pick up pace, particularly in the second half of 2024, driven by the technology upcycle and China’s gradual post-pandemic recovery.

The firm also expects 2024 GDP growth to expand further to 4.9 percent, alongside a resilient services sector backed by an increase in tourist arrivals.

Source: NST