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Manufacturing Showing Signs Of Distress
Malaysia Perspective | 24 August 2012

By Yang Ming Wan

With inflation retreating, the Malaysian people still feel that costs are high while the growing Malaysian economy indicates little risk of deflation. However, the producer price index (PPI) of the manufacturing sector does not reflect that optimism. According to figures released by the Bureau of Statistics, PPI for June plunged into negative territory, shrinking by 0.9 percent year-on-year.

The PPI reflects how the prices of domestic products changes. The Bureau of Statistics gathers figures from five major production areas, namely manufacturing, mining, agriculture, fishery, and electricity, gas and water supply. Manufacturing alone accounts for 80 percent of this index, so it is one of the indices that indicates the health of the manufacturing sector.

First Contraction Since The Fnancial Tsunami
The contraction indicated in the June index is the first crisis faced by our economy since we recovered from the financial tsunami. When US triggered the 2008/2009 financial tsunami, Malaysia’s economy was hard hit. The PPI started free falling from a peak of 16.9 percent positive growth in June 1998 to plunge into the red in December 2008.

The contraction in PPI set off by the financial tsunami lasted for 11 consecutive months until October 2009 before levelling off in November. The darkest hour was in July 2009, when the PPI contracted by up to 13 percent. Eventually, PPI contracted 7.1 percent for the whole of that year, during which manufacturing contracted by 9.3 percent while our economy contracted by 1.2 percent.

From the experience gathered during the 2009 crisis, we can see that once the PPI goes into the negative region, it means that the situation with the manufacturing sector is bad, and the alarm has been sounded. Of course, the contraction in June is just a single month contraction, and the extent was less than 1 percent, so the situation may not be serious yet and it may only be a temporary dip; it remains to be seen whether it will return to normalcy subsequently.

Import Prices Maintain, Local Prices Dip
Despite the fact that other economies are faring poorly, import prices are not getting any lower. The latest June year-on-year figure kept steady at a 0.8 percent increase, an inch higher than the 0.6 percent of May. In any case, imported materials account for only 20.7 percent of our consumption, and does not carry the same weight as local supplies.

The fact is, economic conditions abroad will exert a significant influence over the prices of local supplies, and will therefore have a direct impact on our domestic PPI. The main reason why import prices have not been falling is primarily due to the fact that these imported materials are mostly semi-manufactured products, the supply and demand of which is tightly controlled.

The sector that fared the worst in terms of its extent of contraction is agriculture, which fell 9.3 percent year-on-year. This is obviously due to commodity prices being weighed down by the poor state of overseas economies. Similarly, the mining sector also fell 5 percent year-on-year, which can be attributed to international crude oil prices falling to a two-year low in June.

By comparison, manufacturing, which fell slightly by 0.3 percent year-on-year, retreated by the smallest margin among these three sectors, therefore accounting for the slight dip of 0.8 percent in the PPI, and averting undue attention. However, if imports are taken out of the equation, our domestic PPI actually shrank by 1.5 percent.

PMI Retreats Into Negative Region
Even though the PPI’s retreat into the negative is, for the time being, marginal, it is still an important sign for alert.

Just when JP Morgan’s global manufacturing purchasing managers index (PMI) for June dropped to 48.9 (anything below 50 indicates a negative growth), China’s official PMI figure for July slipped further from 50.2 in June to 50.1, hovering right on the verge of the watershed 50 level. If this level is breached, it bodes ill for Malaysia’s exports.

Summing up from the PMIs of other economies and our domestic PPI, all the warning lights are flashing for the manufacturing sector.

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