Slower IPI growth seen this year

Kenang Research said weaker external trade due to the prolonged global supply chain issues amid China’s extended lockdowns and the Russia-Ukraine war would also be responsible for the slower outlook.

PETALING JAYA: The manufacturing index growth of the industrial production index (IPI) may settle slightly lower this year following deeper-than-expected contractions in April and May, says Kenanga Research in a report.

It said weaker external trade due to the prolonged global supply chain issues amid China’s extended lockdowns and the Russia-Ukraine war would also be responsible for the slower outlook.

“Nonetheless, we still expect manufacturing growth to be underpinned by strong domestic demand and this has been signalled by a slight improvement in Malaysia’s purchasing managers’ index (PMI) in June at 50.4,” it said.

The research house retained its gross domestic product growth forecast for this year at 5% to 5.5% on expectations of strong domestic demand and trade recovery as China continues to ease restrictions.

“However, our projection considers lingering downside risks related to global supply chain issues and a global recession as major central banks continue to aggressively tighten monetary policy,” it said.

Meanwhile, Hong Leong Investment Bank (HLIB) Research said that on the global front, manufacturing PMI edged lower in June at 52.2, weighed by contraction in new export orders amid reduced international trade flows.

“Headwinds from supply chain disruptions, elevated inflationary pressures and prolonged geopolitical tensions continue to cloud the global manufacturing landscape.

“For Malaysia, the transition to endemicity is expected to support the domestic-oriented manufacturing industries.

“We maintain our expectation for Bank Negara to raise the overnight policy rate (OPR) by another 25 basis points in September, bringing the OPR to 2.5% by the end of 2022,” said HLIB in a report.

TA Securities said in a report the impact of the ongoing global uncertainties, following the geopolitical instability and lockdown in cities across China, remains manageable.

“Operating conditions of the Malaysian manufacturing sector have been improving at a slightly quicker rate halfway through 2022 and production levels stabilised for the first time following five consecutive monthly declines,” said the research firm.

Malaysia’s IPI moderated to a three-month low in May 2022 at 4.1% year-on-year, a 0.5% fall from April.

Kenanga Research said the fall was attributable to a deeper contraction in the mining index, which outweighed expansions in the manufacturing and electricity indexes.

“Manufacturing index growth accelerated in May to 6.9%, in line with a sharp expansion in exports growth at 30.5% and manufacturing sales growth at 15.7%, but mainly due to a low base effect.

“The expansion was primarily driven by stronger growth of electrical and electronic products at 15.5% and transport equipment and other manufactures at 12.4%, which reached its highest level in nine months,” it said.

Mining index recorded its deepest contraction in four months at minus 4.9%, mostly due to a high base effect.

“It was attributable to a broad-based decline among the extraction of crude oil and natural gas at minus 4.9%, the output of crude petroleum at minus 6.7%, and in natural gas production at minus 3.6% despite higher global oil prices.

“Electricity index rose to 2.8%, its highest level in three months,” it said.

The 2022 manufacturing index forecast was revised down to 5.5% from 7% previously.