Shrinking factory activity nothing to worry about, says economist

Factory activity contracted in most Asian countries last month as an escalating trade war between the US and China raises fears of a global economic downturn. (Bernama pic)

PETALING JAYA: An economist has shrugged off news that factory activity in most Asian countries has contracted due to the escalating trade war between the US and China, saying it should not be cause for worry.

“This is a cycle. There’s nothing to be dramatically concerned about,” Geoffrey Williams, a professor at HELP University’s ELM Graduate School, told FMT.

He added that cycles are affected by events that happened a few months ago rather than current events.

“Whatever US President Donald Trump says today or the next couple of days, especially when it comes to talk about tariffs, won’t have any impact on factory output the next day.

“The cycle lags. It is not influenced by what happens today,” he said.

Referring to trends several months ago, from December last year to March this year, Williams said factory output had been above forecast in many parts of Asia, including Malaysia and Singapore.

He said it could be argued that manufacturers had decided to increase output during this period in the event that the US-China spat worsened.

But this would have played no role in terms of factory activity as factories would still have stock, he said.

Yeah Kim Leng, who heads Sunway University’s economic studies programme, said while activity appears cyclical, especially in the electronics sector, there has been a “fairly synchronised performance across the region”, where exporting countries show a decline in factory activity.

He said this is a cause for concern as it shows firm signs of a slowdown in output.

However, he also spoke of a silver lining, saying the US-China spat has resulted in trade diversion even though demand has declined.

He said industries from the two nations affected by the higher tariffs would be looking for alternative sources of supplies.

“So countries like Malaysia and Vietnam, as well as other Southeast Asian countries that are part of the global supply chain, will see some diversion in trade and investment.”

He also cited a recent report by Nomura Global Markets Research which states that Malaysia is the fourth largest beneficiary of the trade diversion arising from the trade war.

While this is a “positive”, though, Yeah cautioned that a prolonged trade war between the world’s two largest economies would impact everyone with or without trade diversion.

He suggested that Malaysia begin taking preparatory steps to shield the economy from recession, including boosting support for small-medium enterprises to ensure that companies and industries do not fold.

Institute for Democracy and Economic Affairs director Laurence Todd meanwhile called for a review of trade deals to overcome the problem.

These include the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which the government is still taking under consideration.

He gave the example of Vietnam, which he said had received a significant boost in investment, partially due to its ratification of the CPTPP.

“Back then, people predicted that Vietnam would see a lot of investment, and it happened. So I think we should consider this,” he said.

Todd also urged Putrajaya to do all it can to promote economic growth to deal with the repercussions of a trade war.

This includes reforms in procurement, liberalisation in economies and the presence of government-linked companies in some sectors.

“We need to make Malaysia an attractive place for investment.”