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PETALING JAYA: A lockdown of 17.5 million people in China’s “Silicon Valley” and prolonged Russia-Ukraine war are likely to worsen global supply chain disruptions, and for countries, including Malaysia, that are deeply intertwined with global trade, they could impact the local economy.
Malaysia’s factory output, as measured by the Industrial Production Index (IPI), slowed down in January by moderating to 4.3% year-on-year (y-o-y), missing market predictions of 5.1%.
Economists said continued external challenges may further decelerate the output growth in the coming months.
According to Maybank IBG Research, the economic outlook is currently subjected to heightened downside risk.
Russia began the invasion of Ukraine on Feb 24, causing more than 2.5 million Ukrainians to flee their country. With Russia and Ukraine being major suppliers of commodities such as grain and oil, the conflict has raised the alarm on the potential impact on the global supply chain.
Meanwhile, the Chinese government has ordered a lockdown in Shenzhen, the biggest city in the manufacturing hub of Guangdong province, as Covid-19 cases begin to spike again.
This has threatened manufacturers operating in the city, including key Apple supplier Foxconn, as factories were told to suspend production.
Despite the lingering challenges, it is not all doom and gloom.
Maybank IBG Research said the Malaysian economy has expanded faster in January, as Covid-19 related restrictions have largely been lifted.
“In January, the IPI eased to 4.3% y-o-y (December 2021: 5.9%), while distributive trade index and crude palm oil output growth picked up to 3.6% y-o-y (December 2021: 0.8% y-o-y) and 11.3% y-o-y (November 2021: 8.8% y-o-y) respectively.
“Inputting these indicators into our monthly gross domestic product tracker spreadsheet, we estimated that the economy grew by a faster 3.4% y-o-y in January (December 2021: 2.6% y-o-y),” it said in a note.
The moderate IPI growth in January was due to the softer manufacturing growth and a steeper decline in mining production, which offset the pickup in electricity production.
The manufacturing production, which carries a 65.9% weightage in the IPI, grew by 6.8% in January compared with 8.4% in December 2021.Manufacturing production eased as a result of a moderation in both domestic and export-oriented sectors.
Mining production contracted by 5.1% in January, compared with a contraction of 2.6% a month earlier.
However, Malaysia’s electricity production expanded by 7.7% in January compared with 4.7% in the last month of 2021.
On a monthly seasonally adjusted basis, Hong Leong Investment Bank (HLIB) Research said the IPI contracted by 1.4% following lower production across the board.
Manufacturing and mining production declined by 1.8% and 0.5% respectively, while electricity output fell by 0.02%.
“The weaker manufacturing production was attributed to lower capacity utilisation, especially in the electrical and electronic products and food, beverages and tobacco products subsectors,” it said in a note yesterday.
Looking ahead, HLIB Research said the rise in Omicron-related cases in the early part of 2022 could lead to moderation in Malaysia’s economic activity due to quarantine requirements.
“Nevertheless, going forward, the decision to transition into endemicity which allows longer operation hours for businesses and reopening of international borders are expected to support the domestic-oriented sectors. However, with the escalation of geopolitical tensions and the potential adverse effect on global growth, we maintain our expectation for Bank Negara to increase the overnight policy rate by 25 basis points in the fourth quarter of 2022,” it added.
Meanwhile, TA Securities Research believes that Malaysia’s manufacturing activity will continue to pick up in 2022, driven by the recovery in global demand, continued support domestically, and the positive impact from the vaccine rollouts.
In addition, it expects the role of foreign direct investments to be significant in Malaysia’s growing economy, particularly in the manufacturing sector.
The research house also noted that the country’s manufacturing purchasing managers’ index (PMI) rose to 50.9 in February 2022, up from 50.5 in January 2022.
“This indicates that the manufacturing activity will keep growing, even though businesses have problems with increasing production costs due to the higher input prices and other supply constraints.
“Therefore, looking at the historical relationship between the PMI and official statistics, the latest reading indicated that industrial production continued to improve in the short term and is likely to contribute positively to economic growth in Q1 of 2022.
“Nonetheless, the recent military operations by Russia on Ukraine could pose a long-term downside risk due to potential shortages of materials and prolonged disruption in the global supply chain,” it said.