Rising Covid-19 cases a key risk to industrial production, say economists

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KUALA LUMPUR (Oct 12): A new wave of Covid-19 cases is at the top of economists' list of significant risks to industrial production, as another surge in infections could lead to shutdown of businesses.

Malaysia today reported a moderation in its Industrial Production Index (IPI) to 0.3% year-on-year (y-o-y) for the month of August, versus 1.2% y-o-y in July, amid weaker export performance during the month.

The weaker growth was in line with the moderation in manufacturing output, which accounts for more than two-thirds of the index, as well as the mining sector's continued fall in output, according to MIDF Research.

The research house maintains its full-year forecast of a -3.7% contraction for this year following the release of the IPI data, as it takes into account the impact of businesses closing down temporarily due to the imposition of the Movement Control Order (MCO).

It pointed out that the IPI registered an average decline of -6.4% y-o-y, although it expects industrial production to continue to recover amid growing domestic spending and increasing trade activities as restrictions and lockdowns have been eased in many countries including Malaysia.

"However, we are cautious that recovery in industrial production could be weaker than expected given the recent decline in Malaysia's manufacturing Purchasing Managers' Index, which indicates activities in the manufacturing sector slowed over the past few months," said MIDF.

"We are also concerned that domestic sentiment and economic activities could weaken once again if the Targeted Enhanced Movement Control Order introduced in selected areas takes a long time to effectively contain the new wave of Covid-19 cases in Malaysia," it added.

The research house said the new wave of Covid-19 is a key downside risk that could affect production and trade activities in the coming months, as well as the geopolitical tension between major trading partners.

Meanwhile, RHB Research economist Ahmad Nazmi Idrus said there is "little upside to look forward to" amid a greater downside given the rise in number of Covid-19 cases.

Ahmad Nazmi also noted that the pent-up demand effect has started to dissipate, as the economy moves away from the euphoria following the global easing of restrictions and towards a lower demand trend.

"With little upside to look forward to, and greater downside amid the rising threat of new Covid-19 cases domestically and globally, the outlook for production appears bleak at best," he said.

RHB maintains its gross domestic product growth forecast at -4.0% y-o-y for 2020 and 7% for 2021.

The Department of Statistics Malaysia said the 0.3% y-o-y growth in the August IPI was led by a 2.4% rise in the manufacturing component, although the mining and electricity segments showed decreases of 6.7% and 1.2% respectively.

Other index components that showed growth for the month included the electrical and electronics products (6.9%), transport equipment and other manufacturers (6.9%) as well as food, beverages and tobacco (4.7%).

Meanwhile, the mining sector's output fell 6.7% during the month, amid decreases in the crude oil and condensate index (-5%) and the natural gas index (-8%), said the department.

S Kanagaraju