THE rising number of Covid-19 cases since early May 2021 resulted in a nationwide movement control order (MCO 3.0) in mid-May, which was followed by a nationwide lockdown in early June.
The restrictive measure has paralysed large parts of economic and social activities across the country.
As a consequences of the stringent measures, manufacturing activities in several key areas were affected severely, in particular Selangor and Kuala Lumpur. Factories were forced to scale down their operations or shut down to comply with the new measures to address the pandemic.
The restrictive measures affected a wide range of industries and suppliers in these regions and this resulted in a crippling impact on the global manufacturing supply chains which struggled with supply capacities and delivery times. It will be tough for them to clear their backlogs of orders swiftly.
An important point to note here is that manufacturers and suppliers in Selangor and Kuala Lumpur are varied, including high-value manufacturing industries in the fields of engineering and manufacturing, automotive, healthcare, chemicals and technology and many others.
As a result, it also impacted companies outside Selangor and Kuala Lumpur which experienced disruptions as their sub-tier suppliers are located in the two affected regions.
Companies that produce capacitors for the automotive and telecommunications industries, and medical device makers were hit by the MCO 3.0 as many of their sub-tier suppliers located in Selangor and Kuala Lumpur were forced to shut down.
The impact from MCO 3.0 caused those in the automotive and iron and steel segments to halt their operations until the restrictive measures were relaxed. Several carmakers closed their factories on June 1.And even sectors that were allowed to operate at 60% of their workforce shut down their operations temporarily due to the pandemic outbreak, labour shortages or other operational challenges.
For instance, our big players in areas like styrene monomer producer, refined tin maker, semiconductor players, electronic components makers and many more had to stop operations. Meanwhile, factories which were allowed to operate without restrictions under MCO 3.0 experienced a drop in productivity.
The Semiconductor Industry Association found that MCO 3.0 had reduced our semiconductor output by 15%-40% and cut inventory levels although semiconductor makers were exempted from the restrictions due to supply issues, labour shortages and rising Covid-19 cases.
Major component suppliers who manufacture multi-layer ceramic capacitors and crystal oscillators used in a wide range of electronic products were all affected.
The crippling impact from MCO 3.0 was reflected in the headline IHS Markit Malaysia manufacturing Purchasing Managers’ Index (PMI).
Data from the PMI suggested that output slipped for the fourth month in a row. It started in May with a reading of 51.3 from 53.9 in April and eventually dipped to 39.9 in June. It has been in the contraction region defined by the “50” threshold since June. In August, the reading came in at 43.4 from 40.1 in July.
The PMI data showed that the pace of the reduction remained marked, suggesting a moderation in manufacturing output and broadly stagnant gross domestic product (GDP).
This could be attributed to the lack of demand due to poor customer and consumer confidence, shortages of inputs causing companies to reduce production and holding back projects while new export orders did not pick up as Covid-19 cases also rose in key external markets.
And there was a renewed drop in employment while input cost climbed for the 15th consecutive month in August due to rising prices for raw materials and logistics.
This severe impact from MCO 3.0 should result in a slight contraction in third-quarter GDP as the country will be still reeling from lockdowns and the dissipating base effect.
Overall, the economy grew at 7.1% y-o-y in the first half of 2021 from a decline of 8.4% y-o-y during the first half of 2020.
The near-term economic outlook remains tilted to the downside amid uncertainties which include a risk of slower recovery should there be a delay in reopening the economy on account of a delayed resolution of the pandemic, outbreaks of new viral variants both internally and externally, prolonged tight containment measures with phase four of the National Recovery Plan starting in 2022, policy uncertainty and a slower recovery in the labour market.
On that note, the full-year economic growth for 2021 would likely hover between 3% and 3.5%. And the economic outlook for 2022 should be more promising supported by the reopening of most economic sectors and the positive spillovers from continued improvement in external demand.
The overnight policy rate (OPR), which is at a historical low of 1.75%, is expected to stay for the rest of the year. The current monetary settings are sufficiently accommodative to support growth.
Lowering the OPR will likely result in banks becoming more cautious in lending, more so following the announcement of a repayment moratorium.
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