The State of the Nation: After a torrid April, rebound in May manufacturing not a given

TO be released later this week, a slew of manufacturing data for May is expected to provide further indication of the sector’s performance after a dismal April.

It was a challenging month for the sector. Most manufacturers had to halt their activities because of the Movement Control Order (MCO), while others — deemed “essential services” — were operating at only half capacity.

As a result, Malaysia’s manufacturing Purchasing Managers’ Index (PMI) for April fell to a new low of 31.3 points since the survey started in 2012.

Nevertheless, with Malaysia and other nations now easing restrictions instituted to curb the spread of the coronavirus, is a rebound on the cards for May’s manufacturing PMI, after a near standstill in local activities and international trade?

“There is a trend for the manufacturing PMI to rebound as lockdown measures are gradually lifted and production constraints ease,” says UOB Malaysia senior economist Julia Goh, who expects Malaysia’s manufacturing PMI to bottom out in the second quarter of the year.

“However, several producers are still operating at less than half capacity even after the easing of the MCO amid weak demand, supply disruptions and safety measures. The key to watch out for is the pace of recovery in the third and fourth quarters,” she observes.

Just before the Lunar New Year celebration this year, China was the first country to impose a strict lockdown on Wuhan city — once ground zero for Covid-19. The Caixin manufacturing PMI saw a sharp plunge in February to 40.3 from 51.1 in January but staged a strong comeback in March, registering 50.1 points.

It is worth noting that China had started to gradually ease restrictions only from end-March. The latest data released in April shows, however, that the PMI has declined slightly to 49.4 points on weaker export demand.

Meanwhile, export-driven South Korea, which managed to stem Covid-19 without locking down the country, is also facing a continued slide in manufacturing PMI, recording a mere 41.6 points in April from 49.8 points in January.

The weakness in the April manufacturing PMI report comes from plummeting global demand, which is to be expected since most of the world has been in lockdown, says IHS Markit economist Joe Hayes.

Dr Yeah Kim Leng, economics professor at Sunway University Business School, also expects the manufacturing PMI to rebound in May as more firms and industries resumed production during the month.

He believes, however, that the data will have to be interpreted with great caution because of the severity of the output collapse in April, as the PMI is based on the direction of change in the survey responses.

“The manufacturing PMI is derived from a weighted proportion of firms experiencing improvement, no change or deterioration. The index does not take into consideration the magnitude of change that the surveyed firms are experiencing,” Yeah explains.

He believes that other indicators such as actual industrial output, capacity utilisation, employment and gross domestic product (GDP) are needed to gauge economic activity more accurately.

“In a paradoxical sense, the leading indicator could also be disrupted by the crisis,” he adds.

Meanwhile, Lee Heng Guie, executive director of the Associated Chinese Chambers of Commerce and Industry of Malaysia’s Socio-Economic Research Centre, projects a continuing decline in the index in May, as most industries are operating at only 60% to 70% of capacity, even though almost all economic sectors have resumed operations.

“Some are still sorting out reopening-related issues, supply disruption and a slow recovery in demand,” he observes.

Many of Malaysia’s major trading partners have also yet to recover, but Lee says a reading of their manufacturing PMI could serve as a gauge for the local industrial sector, particularly manufacturing.

“While the export-oriented industries represent a key component of the manufacturing sector, domestic market-oriented industries are also an important barometer,” he adds.

Yeah is less concerned with the PMI of other economies as a reliable indicator to track recovery. He believes it is necessary to look into the leading economic indicators to get a sense of what lies ahead for Malaysia.

“Mirroring the April manufacturing PMI, the DOSM (Department of Statistics Malaysia) leading indicator showed a sharp 4.9% drop in March, suggesting a sharp decline in economic activities in the coming months.

“To look ahead, we will have to first validate the manufacturing PMI, other leading indicators and initial expectations with other economic indicators, especially the monthly Industrial Production Index, external trade, wholesale and retail sales, and quarterly GDP numbers to form a reliable view on the current state of the economy and then update forecasts real time with the release of each set of indicators,” he says.

As countries around the world ease out of their various stages of lockdown, is the global economy close to bottoming out?

Lee says it will take some time. “The skyrocketing unemployment rate and income retrenchment in our major trading nations will curtail demand for our exports. On the domestic front, we expect to see a shift in consumer spending because of the behaviour protocol under the new normal conditions as well as some reduction in spending, owing to the dampening impact of job and income losses.”

The US — one of Malaysia’s main trading partners — has seen first-time unemployment claims skyrocketing in the millions for 10 consecutive weeks. Last Friday, reports showed that the first-time claims for unemployment benefits stood at 2.1 million, the lowest since the start of the pandemic.

That said, the economy will eventually bottom out as lockdowns ease and social, consumption and production activities resume.

“The proverbial question is whether the recovery will be L, U or V-shaped,” says Yeah, adding that the recovery appears to be heading in a trajectory of something between a V and a U shape, barring a US-China geopolitical flare-up or other major regional conflicts.

“The main reasons supporting this prognosis include the severity of the pandemic-induced economic shock that has hit a number of countries, particularly the US, where 40 million jobs have been lost since the [start of the] outbreak. It will take some time for economic activities to normalise and to recreate the jobs that have been lost.

“A second reason is that a Covid-19 vaccine is not expected for another nine to 15 months and the threat of … subsequent waves of infection will keep consumers wary of spending. As a consequence of poor consumer confidence and deficit demand, a V-shaped recovery will be highly unlikely.”

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