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Manufacturing’s Bumpy Road To Recovery
Malaysia Perspective | 11 June 2010
By:

Written by Yang Ming Wan

While Malaysia’s manufacturing and production is on its way to recovery, the way ahead is far from smooth sailing. The industrial and manufacturing production index for this February was far from satisfactory, signalling that the road to recovery ahead is still a bumpy one.

Industrial production in January this year rebounded by more than 13.7%, triggered by a strong showing of 18% growth in the manufacturing sector. This prompted the market and industry forecasts to predict at least a double-digit growth in industrial production this February.

However, the situation took a dramatic turn, when growth figures for February showed that industrial production grew by merely 4.9% and manufacturing by only 6.8%. It was already disheartening news that industrial production fell short of a double-digit growth; that even manufacturing could not achieve double-digit growth was a double-whammy.

Although this February was a short month and coincided with the Chinese New Year public holidays, it was expected that production will be lower than in January. However, the fact that those few days caused industrial production to shrink in excess of 11% and manufacturing output to retreat by almost 10% as compared with January show that the situation is far from normal, that recovery in the manufacturing sector is apparently not as sure as anticipated.

Rebound Strongest At Bottom
The revised manufacturing output growth figure for January was 18.1%, the fastest growth since the heady 23% growth figure registered in January 2004, exactly 6 years ago. In 2004, manufacturing started the year with a bang but ended with a whimper; from the record growth figure in January, manufacturing output slowed down so much that by December that year the figure had dived below 6%. We have seen a replay of this ‘great start-lacklustre ending’ scenario in 2008. We really do not want history to repeat this year.

The fact that the double-digit growth rate of January was not sustained in February cannot be explained away with the fewer work days due to the Chinese New Year holidays. Compared to February last year, when industrial and manufacturing production had just been hit by the financial crisis and was at a rock bottom level that was way below the basis point, industrial production in February then was just 3.5% lower than the preceding January, while the manufacturing sector dipped slightly than in January.

Both Februarys suffered the same fate for being the month most badly hit by the financial crisis. Based on the principal of ‘heavy fall, strong rebound’, while taking into consideration the comparative advantage of the fundamentals, if the rebound over these two months was minimal, it would have been the natural response of a ‘big fall, small rebound’ that fitted the scenario painted in this column last month when I analysed the phenomenal growth in January this year.

The fact is, this February’s rebound was actually far weaker than January, demonstrating the fragile recovery that manufacturing is experiencing.

45% Of Manufacturing Sector In Decline
A careful scrutiny of the February growth figure of the 7 product groups making up the manufacturing sector showed two groups actually retreating back into negative growth territory with another group edging dangerously close to the negative region. The mixed growth results of February showed some groups slowing down, which is already a worrying trend, but for some groups to even go into contraction shows that the situation is indeed a far cry from January, which showed all groups returning to growth. Recovery is indeed shaky with choppy waters ahead.

Petroleum, chemical, rubber and plastic products group contracted by as high as 10.5%, while food, beverages and tobacco also suffered a slight decline of 1.7%; the textile, clothes, leather goods and footwear group which enjoyed a 7.2% growth in January slowed down significantly by February to hit 1.2%, edging dangerously into stagnation or even contraction territory.

The first two declining product groups account for 28.71% of the total industrial production index, which is equivalent to almost half (45%) of the 63.51% weighting of manufacturing within the total industrial production.

From this perspective, the road to recovery for manufacturing is a tentative one; if there are any significant changes in the external environment, this recovery may even be derailed.

Of the declining product groups, petroleum refining suffered the most severe decline by as much as 36.7%. This item alone accounts for more than 10% of the entire industrial production. As a result of fluctuating oil prices, refined petroleum production has been in contraction for a prolonged period; its relatively modest contraction of 17.9% in January this year helped to keep its group of products growing by 4.3%. However, the situation in February deteriorated by more than twofold, thus negating the growth in the other components of the same products group and pushing the group into a double-digit decline.

Other subset of products with a high contraction rate is the computers and office electronic products, which declined by nearly 21%; however, thanks to their relatively lower weighting and the higher than expected growth of the other products within the same group of electrical and electronic products, the poor showing did not affect the stellar growth of 31% of the E&E group. Nevertheless, this growth figure is still a retreat from January’s figure of over 35%.

In addition to export-oriented manufacturing, production of tobacco for domestic consumption had declined by more than 12%, while food and beverage production contracted by 1.4%, resulting in the food, beverage and tobacco group to decline by 1.7%. This development is harder to read into. The same group grew by 6% in January this year and even touched 10% in the last quarter of last year. With even the domestic market slowing down or even contracting, recovery is looking really uncertain.

Rising Prominence Of China Factor
Instead of blaming the Chinese New Year for causing the dismal showing of the industrial and manufacturing sectors in February, it is more pertinent to attribute the poor results to the China Factor. After the financial crisis, China has replace the U.S. as our primary market for our exports. This realignment of export market had directly contributed to the current slowdown in industrial and manufacturing production.

Our export to China in January this year jumped sharply by 137%, contributing to the good export performance for the month, causing manufacturing to grow by more than 18%. However, when China celebrated the Chinese New Year with their Golden Week holiday this February, our exports to China grew by only 39%, so naturally this huge difference had led to the poor figures for the month.
It is unhealthy for us to be excessively dependent on either the U.S. or China markets. However, the good thing is when the U.S. economy recovers, both markets may become our key markets. Until then, we still need to negotiate this bumpy road to recovery very cautiously.


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