KUALA LUMPUR (Jan 11): Economists expect Malaysia’s industrial production to decelerate in the first quarter of 2021 (1Q21) after the November 2020 figure came in below expectations.

In a note today, RHB Research senior economist Nazmi Idrus said the deceleration will be on the back of more stringent measured by the authorities to contain the spread of Covid-19 such as the Movement Control Order (MCO) in economically important geographies.

“Any efforts to re-tighten restrictions will be negative for domestic-oriented production. Industries such as food, beverages & tobacco are likely to be directly affected if business hours are reduced while seating and movement capacity is limited again,” he said.

Nevertheless, Nazmi said sectors such as transport equipment are expected to continue to record strong growth ahead.

He said channel checks indicate that demand for vehicles remains strong, following rush purchase of passenger cars to take advantage of the sales tax exemption and these trends are expected to continue into 1H21.

In contrast to subdued growth in domestic-oriented industries due to the stricter movement restrictions, Nazmi foresees ongoing gradual improvement ahead for the export-oriented industries.

“Production of electrical & electronic products are expected to grow on a healthy pace, following increased global attention towards 5G implementation, as well as government-led digitisation. Similarly, production for petroleum & chemicals are supported by high demand for rubber gloves and pharmaceutical products.

“Meanwhile, production of other segments such as wood & paper, as well as textiles & apparels are expected to remain weak, following modest global demand growth ahead,” he said.

The Industrial Production Index (IPI), which measures production from the manufacturing, mining, and electricity generation sectors, recorded a 2.2% year-on-year (y-o-y) contraction in November 2020, according to the Department of Statistics Malaysia.

Prior to the IPI’s contraction in November, the index fell 0.5% y-o-y in October, after growing 1% in September. t.

The IPI for November 2020 fell 2.2% from a year ago, dragged mainly by the mining index, which decreased 15.4%, while electricity output fell 2.5%. Meanwhile, the manufacturing index showed a positive growth of 2%.

The November 2020 factory output is lower than the 0.5% decline forecast according to a Bloomberg poll, and 0.2% rise seen in a Reuters poll.

The November figure also came in weaker than MIDF Research's expectation of 0.2% y-o-y growth. Hence, the research house has revised downward the IPI forecast for 2020 a a whole to decline at a faster pace of 4.6%, from a projected 3.7% decline previously on weaker expectation for IPI numbers in 4Q20.

With Covid-19 cases remaining elevated, MIDF Research also concurs that tighter restriction in early 2021 will further curtail domestic spending.

However, the research house expects resilience in the external demand to lend support to trade-oriented IPI.

Following the yearly contraction of 4.6% y-o-y in 2020, MIDF Research is projecting IPI to rebound and grow by 6.3% for full-year 2021, supported by the recovering demand both from domestic and external markets.

Prime Minister Tan Sri Muhyiddin Yassin today reinstated the MCO in the states of Penang, Selangor, Melaka, Johor and Sabah, as well as the federal territories of Kuala Lumpur, Putrajaya and Labuan for a two-week period starting Jan 13.

Meanwhile, the Conditional MCO (CMCO) will be enforced in six other states — Pahang, Perak, Negeri Sembilan, Kedah, Terengganu and Kelantan — while Perlis and Sarawak will be under the Recovery MCO (RMCO) during the same period.