Kenanga: Industrial production to make a comeback in near term
12 Jun 2020
Malaysia’s industrial production is expected to make a comeback in the near term following the gradual reopening of the economy, says Kenanga Investment Bank.
The investment bank said the government has announced the recovery movement control order (RMCO) from June 10 to August 31, 2020, replacing the conditional movement control order (CMCO), to revive the domestic economy.
“This is expected to spur higher domestic demand and businesses to operate at a much higher capacity,” it said in a research note today.
However, it said it is still early to make a conclusive assessment of the economic impact of the movement control order (MCO) on gross domestic product (GDP) growth for the second quarter (Q2) of 2020.
“Our base case projects Q2 GDP growth to decline by 7.5 per cent, compared to 0.7 per cent growth in the first quarter of 2020, on the back of a projected fall of 13.1 per cent of real manufacturing growth in the quarter.
“We may have to downgrade our Q2 and 2020 growth forecast if factory output remains weaker than expected in May and June in spite of the relaxation of the MCO. For now, we maintain our GDP growth projection of negative 2.9 per cent for 2020,” it added.
Meanwhile, Affin Hwang Investment Bank said Malaysia’s Industrial Production Index (IPI) growth contracted to an average of 7.5 year-on-year (y-o-y) from January to April 2020, significantly lower than the three per cent growth registered in the same period last year.
“We believe that economic losses to businesses and households may be larger and broader during the MCO in Q2 than in Q1. We expect Malaysia’s real GDP to contract sharply by around eight to nine per cent y-o-y in Q2,” it said.
It said growth in the manufacturing sector would remain in a declining mode in the second half of the year (2H) and production would begin to stabilise from its low point only when exports improve in late 2020.
“Manufacturers in the country are unlikely to increase production significantly, despite the implementation of the RMCO, until they see better global economic prospects in 2H,” it said.
It said the World Trade Organisation has projected world trade to decline sharply by between 13 and 32 per cent in 2020 due to the disruptions to global supply chains and shipping routes from the lockdowns, with disruptions in sectors with complex value chains namely electronics and automotive products.
Going forward, it said healthy global semiconductor sales would be supportive of the production of Malaysia’s electrical and electronics products and the country’s exports in general.
“However, as the containment measures in other countries are likely to be continued, we believe that lower external demand may persist amid slower global growth and prolonged global supply chain disruptions,” it said.
It said the likelihood of rising trade tensions between the United States and China would also be a downside risk going forward for Malaysia’s manufacturing output and exports.
“After posting a positive 0.7 per cent in Q1, we believe the Q2 GDP growth will be in sharp negative territory and the economic contraction will be more broad-based,” it said.
According to the Department of Statistics Malaysia, Malaysia’s IPI declined 32 per cent y-o-y in April 2020 due to the implementations of the MCO to prevent Covid-19 outbreaks.