Manufacturing gets off to a good start


  • Business
  • Saturday, 16 Mar 2013

HOW will the market interpret the latest set of trade and manufacturing sector data which, while encouraging, is still giving out mixed signals?

On first read, the January data showed improvements from December amid the more positive news flow from the United States and Japan. This was tempered by the slowdown in China and the continuing crisis in the euro-zone.

On a year-on-year basis, the exports portion of the trade data for January looked good, rising 3.5% after the 5.8% contraction in the previous month. January exports was also above market consensus.

Imports painted a brighter picture, surging 16% after the 6.5% decline in December. The expectations was for a median 2.6% gain.

In particular, the 6.3% growth in intermediate goods imports is an indication that manufacturers are stocking up in anticipation of better external demand in the months to come. Even more encouraging was the 9.1% jump on a month-on-month basis.

The 7.2% jump in capital goods imports reflects to a large extent the demand generated by the implementation of the Economic Transformation Progamme and 10th Malaysia Plan projects while domestic consumption appears to be steady as consumption goods imports was up 7.3%.

This was in contrast to the month-on-month declines for capital and consumption goods.

However, there is reason to be cautious as Alliance Research chief economist Manokaran Mottain tells StarBizweek. “It's a good start to the year and gives an upside bias for economic growth this year,” he says.

But Manokaran says the signals for stronger growth is still weak because while January's data has improved from December, it's still worse than November.

The industrial production index, which measures factory output, expanded 4.6%, improving from the 3.5% seen in December but still lower than the 5.6% median expectation.

On a month-on-month basis, the electricity sub-index rose 9.3%, indicating a step-up in manufacturing activity although the mining and manufacturing sub-indices registered declines.

Data also showed that the manufacturing sector posted a 7.4% growth in sales value to RM52.4bil in January while on a month-on-month basis, sales value decreased RM200mil. December's sales value was revised upwards to 7.5% from 6%.

Verdict still out on exports

January's exports was largely boosted by the rise in shipments of electrical and electronic (E&E) as well as refined petroleum products. Asean and in particular Singapore together with China figured prominently in exports growth.

Despite the improvement in exports, CIMB Investment Bank Bhd economic research head Lee Heng Guie says in a report that a firm conclusion on the strength of the export recovery can only be drawn in the second quarter.

“We expect a gradual strengthening of exports in the second-half of 2013 and keep our export-growth estimate of 4% to 5% for this year,” he says, adding that this will be a moderate improvement from the 0.6% growth for 2012.

Lee says lower commodity prices, especially of crude palm oil and crude oil, will continue to impact non-E&E exports and this trend is expected to persist.

Generally, he says Malaysia's E&E exports have recovered in tandem with the global E&E industry, with worldwide chip sales rising 3.8% year-on-year in January for the third consecutive month after growing 3.8% in December.

Lee says the US semiconductor book-to-bill ratio (1.14 in January versus 0.92 in December) and global and regional purchasing managers' indices point to a persistent recovery in E&E orders.

However, MIDF Investment Bank Bhd chief economist Anthony Dass chooses to be more cautious, saying that exports growth trend for the year will likely be choppy on three factors: low-base factor, semiconductor industry outlook and commodities outlook.

He says as exports contracted six out of the 12 months last year, the low-base effect should provide some level of positive impetus to exports growth especially since where there was growth last year, it was modest.

Dass says ongoing global economic uncertainties could still weigh on the performance of the semiconductor industry despite the momentum from late last year while earnings from commodities will remain fairly unexciting in the coming months.

Maybank Investment Bank Bhd chief economist Suhaimi Ilias says this year will be a better year for trade with Malaysia's exports and imports to grow 4.5% and 8% respectively and a trade surplus of RM77.8bil.

He cautions that this is premised on global economic growth stabilising at 3.4% this year after slowing in the past two years, which in turn will feed into firmer growth on world trade volume.

Imports tell a different story

The unexpected jump in imports of intermediate, capital and consumption goods indicates that the outlook is not as uncertain as the news flow is painting it to be.

Due to the rise in imports and the subsequent drop in exports value, the trade surplus fell 62.6% to RM3.3bil, the lowest since April 2000. Dass says even though the trade surplus has been decreasing since last October, the rise in intermediate and capital goods imports indicates a healthy outlook for external demand as well as domestic economic growth.

Suhaimi says imports of intermediate goods largely driven by electronic integrated circuits suggests recovery in the E&E industry and in external demand generally.

He noted that the year-on-year rise in intermediate goods imports in January comes on the heels of seven straight months of declines.

Meanwhile, Suhaimi says that domestic demand continues to be more robust than external demand where factory output is concerned. He points out that the output of the domestic-oriented segments of the manufacturing sector picked up 11.3% in January while production growth in the exports-oriented segments moderated to a 2.5% growth largely due to a drag in petroleum, chemical, rubber and plastic products.

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