This article first appeared in The Edge Financial Daily on April 14, 2020

KUALA LUMPUR: Malaysia’s Industrial Production Index (IPI) climbed 5.8% in February to a two-and-a-half-year high.

However, the upward momentum is unlikely to be sustainable in the following month given the expected weak global demand coupled with factories closing temporarily, no thanks to the Covid-19 pandemic.

Economists are projecting a steep fall in the IPI in March and possibly months ahead. This is due to not just factories closing temporarily during the movement control order (MCO) but also an anticipated weak global demand coupled with the supply chain disruption.

Yesterday, the Department of Statistics Malaysia (DoSM) said the increase in the IPI in February was fuelled by strong growth in all major components — mining, electricity and manufacturing production.

Bank Islam chief economist Dr Mohd Afzanizam Abdul Rashid said a steep fall in the IPI is expected in March and April, possibly at a double-digit pace, as a result of the prolonged MCO.

“In the current context, the MCO has put a major constraint on businesses to operate and production activities have effectively grind to a halt,” he told The Edge Financial Daily.

To assess the likely impact of the IPI, Mohd Afzanizam made a comparison of the IPI performance during the recession in 2009.

Citing the DoSM’s statistics, he said the steepest fall in the IPI during the recession in 2009 was in January, contracting 17.6% year-on-year (y-o-y) (see chart).

“Thereafter, the IPI continued to decline but gradually improved. In total, the IPI declined for 13 consecutive months beginning September 2008 to September 2009,” he said.

The sudden pickup in February, said MIDF, was expected due to a low-base effect, coupled with the Chinese New Year celebrated in February 2019.

“In addition, the effects of Covid-19 fears had yet to take place in February and global trade was on an optimistic path amid the phase-one trade deal agreement between the US and China,” MIDF said in a note yesterday.

According to RHB economist Ahmad Nazmi Idrus, the growth in February reflected an increased demand in anticipation of a supply-chain disruption in China. Businesses along the supply chain had started stocking up supplies, anticipating further restrictions, he said in a note.

However, with the MCO implemented since March 18, production is expected to be affected, Ahmad Nazmi added.

The outlook for the first half of the year will be cloudy, said MIDF, with major and emerging economies’ IPIs to remain sluggish.

“Global and emerging economies’ Manufacturing PMI (Purchasing Managers’ Index) figures are pointing towards pessimism for the first half of the year. Movement controls and lockdowns in major economies such as the US, Europe and Asia will impede global demand and exports.

“In addition, the plunge in global crude oil prices would [be extra] pressure on oil-exporting economies such as Malaysia, Australia and Saudi Arabia,” said MIDF.

As a result of the gloomy outlook, MIDF is expecting the country’s IPI to contract in the first quarter (1Q) and 2Q of this year following the extended MCO and collapse in global crude oil prices. It has also downgraded its IPI forecast from 1.5% to -2.8% y-o-y for 2020.

The ongoing Covid-19 outbreak and slowdown in global demand will affect Malaysia’s manufacturing output too, it added, while the oil price war will cause the average global oil price to decline.

Contrarily, MIDF opined that domestic-oriented industries will continue expanding steadily, underpinned by a firm domestic demand.

Further, among key fundamental factors supporting private consumption this year are a lower overnight policy rate, a higher disposable income, low inflationary pressure and a stable job market, it said.