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Solid upturn by manufacturing sector

Solid upturn by manufacturing sector

04 May 2021

With the Malaysian manufacturing sector’s new orders growing at the fastest pace in seven years amid stronger export sales, IHS Markit warns that consumers could be hit by price hikes in the coming months.

IHS Markit’s chief business economist Chris Williamson said backlogs of work are accumulating at a rate not seen for four years as firms struggle to produce enough goods to meet growing demand.

“Prices are rising as a result of the imbalance of demand and supply, with prices charged by producers increasing at one of the sharpest rates for four years, ” he said in a statement.

Manufacturers have partially passed these higher costs to clients through higher output charges. IHS Markit noted that the output charges rose at a marked pace and extended the current sequence of inflation to 11 months.

Firms are not only facing difficulties in finding sufficient and suitable staff to raise production but are also affected by the worsening delivery delays of inputs, according to Williamson.

“With the exception of April and May last year, during widespread factory shutdowns as a result of the first wave of the pandemic, the latest lengthening of supply chains is the longest in the (Purchasing Managers’ Index) survey’s nine-year history.

“Supply-side constraints have developed further, however, acting as a damper on growth and could restrict the recovery, ” he added.

Commenting on the manufacturing sector’s outlook, Bank Islam chief economist Mohd Afzanizam Abdul Rashid (pic, above) said that a fresh round of movement control order would have a direct impact on the sector and the overall economy.

However, he expects the MCO to be targeted in nature.

“In that sense, the manufacturing sector should see a decent turnaround this year.

“However, if the worldwide lockdown measures were to occur, it will have a significant bearing on the manufacturing sector’s activities, ” according to Afzanizam.

Despite the challenges, the domestic manufacturing sector has seen renewed output expansion in April as firms adjusted to operating under Covid-19 restrictions.

“Manufacturers also grew increasingly optimistic regarding the year-ahead outlook, with hopes that a successful vaccination programme would spur an accelerated recovery in production and confidence, ” stated IHS Markit.

The headline Purchasing Managers’ Index (PMI) – a composite single-figure indicator of manufacturing performance – rose from 49.9 in March to 53.9 in April, indicating a solid improvement in the health of the manufacturing sector.

The expansion was the strongest recorded since the survey began in July 2012.

Looking at the historical relationship between the PMI and official statistics, the latest PMI reading is representative of a solid upturn in industrial production and gross domestic product (GDP), as the survey pointed to a steady recovery from the impacts of the pandemic.

In the case of Malaysia, comparing the headline PMI with annual GDP growth rates shows a reasonably high correlation of 60%, with the PMI acting as a coincident indicator of economic growth.

“Looking ahead, Malaysian manufacturers were increasingly optimistic regarding the year-ahead outlook for output.

“Expectations reached the highest level since August 2019, underpinned by hopes that a successful vaccination programme would induce a broader economic recovery, ” IHS Markit said.

Amid the higher orders and improved sentiment, IHS Markit pointed out that there was a renewed fall in employment at Malaysian manufacturing firms in April.

“Though only marginal, staffing levels have now fallen in 12 of the last 13 months, with manufacturers noting a lack of foreign work permits being issued due to Covid-19 restrictions.

“As new orders returned to growth, firms commented that pressure had continued to build on capacity, as the amount of outstanding business increased for the second successive month, ” it said.

Source: The Star