Manufacturing risks seen ahead


  • Economy
  • Monday, 10 Aug 2020

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PETALING JAYA: The manufacturing purchasing managers’ index (PMI), a measure of the prevailing direction of economic trends in manufacturing, may come under pressure and see contraction over the next few months if there is a resurgence of Covid-19 and tension between the United States and China intensifies.

These events, economists said, could restrict economic activities, hence leading to lower or a contraction of manufacturing output.

The country’s manufacturing PMI eased to 50 points in July from 51 in June and 45 in May, a sign of stabilisation in manufacturing. A figure above 50 indicates an expansion and below 50 is seen as a contraction.

Bank Islam chief economist Mohd Afzanizam Abdul Rashid (pic below) told StarBiz that the PMI dynamics would depend on several factors.

Chief among them is the second wave of Covid-19. “If the movement control order (MCO) is to be reinstated, we could go back to square one, as economic activities will be very restrictive as human mobility will be severely affected.

“The other is the trade war between the US and China. If the tension escalates and both countries resort to tariff and non-tariff measures, international trade will be negatively impacted.

“Otherwise, we can expect the PMI to remain decent as the economy continues to be reopened gradually, ” he said.

AmBank Group chief economist Anthony Dass, (pic below) who is also a member of the Economic Action Council secretariat, agreed with Afzanizam.

More so, he added with the growing noise of a “second wave” of the pandemic kicking in and possibly being worse than the current one. Should that happen, output would collapse significantly and plunge into a deep recession, he noted.

“Even if the second wave is well-contained, challenges remain on the ability of the PMI to remain above the 50 threshold mark of expansion, and contraction in the second half of the year.

“The economic scars left by the pandemic will take some time to heal. Export demand is weak with the downside risk still high from the ongoing uncertainties on the global front.

“Local manufacturers’ optimism comes mainly from backlogged orders, which can pose a challenge on potential sustainability unless demand remains firm and sustainable. Hence, there is still room for the PMI to dip into the contraction region, ” Dass said.

The PMI would move cautiously on an expansionary trajectory in the months ahead, said Socio-Economic Research Centre (SERC) executive director Lee Heng Guie. (pic below)

The key risk to PMI, he said, was the looming concerns about the occurrence of a third wave of the pandemic amid lingering uncertainties about the ongoing trade and technology and diplomatic conflicts between the US and China.

As to whether he foresees the manufacturing sector and exports being impacted, Lee said the manufacturing sector would recover to register a smaller contraction in the third quarter (Q3) and may rebound to positive growth in Q4 of 2020, helped by continued firm demand for electronic and electrical (E&E) products.

He noted that the current shortage of foreign workers in the manufacturing sector has to be addressed immediately to minimise disruption to production.

Lee said: “Exports have turned around to increase by 8.8% in June after recording high double-digit declines in April and May, thanks to the strong exports of electronics and electrical products and rubber products as well as palm oil (mainly due to the price effect).

“We expect exports to remain uneven in the second half of the year, either oscillating between a narrow magnitude of contraction and small positive, largely backed by the E&E sector.

He, however, cautioned that there were risks to manufacturing and exports if there was an occurrence of a third wave locally and globally, which would dampen consumer and business sentiment, and cause a pullback in consumption and investment spending.

With the lifting of the most stringent measures of industrial lockdowns, RAM Ratings group economist Kristina Fong (pic below) felt there has been some improvement in PMI trends although production capacities, especially for export-oriented industries, are still below normal.

At this juncture, she said it was too early to say whether the above benchmark reading of 51 for Malaysia in June would be sustainable, going forward.

She said this was due to the possibilities of future lockdowns, and hence, the full extent of demand destruction both remaining key uncertainties, going forward.

Is further monetary measures and fiscal support needed to improve the economy, including the PMI? RAM’s Fong said: “Public policy is expected to be adaptive to developing economic conditions and recalibrated in line with these changes.

“One example of this will be the recent adjustment to the terms of the six-month bank loan moratorium, which is now more targeted in its coverage.

“We expect policy to be flexible in this regard, going forward. Monetary policy adjustments are also expected to be responsive to economic developments. The deflationary trend this year has afforded more monetary space for further OPR cuts this year if required.”

Bank Islam’s Afzanizam said whether there are more monetary and fiscal measures would be subject to the evolving outlook.

Besides the utmost commitment by the government to prime the economy, development on the Covid-19 vaccine is also music to the ears.

“We have seen Moderna’s research on the Covid-19 vaccine, also known as mRNA-1273, being published in the New England Journal of Medicine in July.

“This suggests that the prospects of the vaccine discovery look quite promising. If that happens, then we can expect the economic recovery narrative to gain further traction, ” he noted.

AmBank’s Dass felt the room for more monetary easing and restricted policies going forward is on the cards, especially should there be future Covid-19 infection waves and future unexpected shocks.

It could also open the doors for additional stimulus measures being rolled out, he said.

“The question remains if the rating agencies will give a free pass for now due to the overwhelming concerns about the deep scarring from the pandemic on business and consumer confidence.

“While Moody’s has maintained its ratings as “stable” and A3, both Fitch and S&P have revised to “negative” from “stable” while maintaining A-, respectively, ” he said.

“Even if the second wave is well-contained, challenges remain on the ability of the PMI to remain above the 50 threshold mark of expansion, and contraction in the second half of the year.

“The economic scars left by the pandemic will take some time to heal. Export demand is weak with the downside risk still high from the ongoing uncertainties on the global front.

“Local manufacturers’ optimism comes mainly from backlogged orders, which can pose a challenge on potential sustainability unless demand remains firm and sustainable. Hence, there is still room for the PMI to dip into the contraction region, ” Dass said.

The PMI would move cautiously on an expansionary trajectory in the months ahead, said Socio-Economic Research Centre (SERC) executive director Lee Heng Guie.

The key risk to PMI, he said, was the looming concerns about the occurrence of a third wave of the pandemic amid lingering uncertainties about the ongoing trade and technology and diplomatic conflicts between the US and China.

As to whether he foresees the manufacturing sector and exports being impacted, Lee said the manufacturing sector would recover to register a smaller contraction in the third quarter (Q3) and may rebound to positive growth in Q4 of 2020, helped by continued firm demand for electronic and electrical (E&E) products.

He noted that the current shortage of foreign workers in the manufacturing sector has to be addressed immediately to minimise disruption to production.

Lee said: “Exports have turned around to increase by 8.8% in June after recording high double-digit declines in April and May, thanks to the strong exports of electronics and electrical products and rubber products as well as palm oil (mainly due to the price effect).

“We expect exports to remain uneven in the second half of the year, either oscillating between a narrow magnitude of contraction and small positive, largely backed by the E&E sector.

He, however, cautioned that there were risks to manufacturing and exports if there was an occurrence of a third wave locally and globally, which would dampen consumer and business sentiment, and cause a pullback in consumption and investment spending.

With the lifting of the most stringent measures of industrial lockdowns, RAM Ratings group economist Kristina Fong felt there has been some improvement in PMI trends although production capacities, especially for export-oriented industries, are still below normal.

At this juncture, she said it was too early to say whether the above benchmark reading of 51 for Malaysia in June would be sustainable, going forward.

She said this was due to the possibilities of future lockdowns, and hence, the full extent of demand destruction both remaining key uncertainties, going forward.

Is further monetary measures and fiscal support needed to improve the economy, including the PMI? RAM’s Fong said: “Public policy is expected to be adaptive to developing economic conditions and recalibrated in line with these changes.

“One example of this will be the recent adjustment to the terms of the six-month bank loan moratorium, which is now more targeted in its coverage.

“We expect policy to be flexible in this regard, going forward. Monetary policy adjustments are also expected to be responsive to economic developments. The deflationary trend this year has afforded more monetary space for further OPR cuts this year if required.”

Bank Islam’s Afzanizam said whether there are more monetary and fiscal measures would be subject to the evolving outlook.

Besides the utmost commitment by the government to prime the economy, development on the Covid-19 vaccine is also music to the ears.

“We have seen Moderna’s research on the Covid-19 vaccine, also known as mRNA-1273, being published in the New England Journal of Medicine in July.

“This suggests that the prospects of the vaccine discovery look quite promising. If that happens, then we can expect the economic recovery narrative to gain further traction, ” he noted.

AmBank’s Dass felt the room for more monetary easing and restricted policies going forward is on the cards, especially should there be future Covid-19 infection waves and future unexpected shocks.

It could also open the doors for additional stimulus measures being rolled out, he said.

“The question remains if the rating agencies will give a free pass for now due to the overwhelming concerns about the deep scarring from the pandemic on business and consumer confidence.

“While Moody’s has maintained its ratings as “stable” and A3, both Fitch and S&P have revised to “negative” from “stable” while maintaining A-, respectively, ” he said.

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