Wednesday, April 1, 2009

Deconstructing IPI Numbers

I finally got around to stitching together the IPI numbers - literally. As my last post on this subject mentioned, DOS has changed the basis of the index to 2005, which means some fancy footwork with splicing the different indexes together. The reason why I wanted to do this is to get a relatively longer view of trends within the industrial sector - which you can't do when the current 2005 index only runs for two years in the monthly series.

In any event some interesting things emerged. Here are the annual log changes in the main indexes, going back to 1999 (which was about the most I had patience to do today):

Note that mining seems to be holding up pretty well - pity it's only got a weight of 23.37. Manufacturing is of course the primary contributor to the downturn. Here are the actual indexes (2000=100):

In terms of output, we're approximately back to the level of 2004. If we take the maximum IPI level as representing full capacity utilisation (there's always some slack, so 90% would probably be a better approximation), then industry is running at about 80% capacity, and manufacturing alone at about 73%. That doesn't strike me as being sustainable for any length of time.

Of course, the main problem we have is with the electronics sub-sector (the electrical side of things has long been declining):

E&E output is now back to the same level as August 1999, nearly a decade ago. In terms of the drop in output, it's about 50% below the peak which was reached a short 15 months ago. Rubber, wood and chemicals also show sharp drops, if not quite as catastrophic as E&E:

In domestic manufacturing, the biggest drop is in construction related manufacturing:

All in all, not a pretty picture. The biggest concern is less the sharp declines in output, but rather how long the downturn will last. At this rate, with virtually no slowdown seen in output declines, there is going to be a lot of destruction on the ground of Malaysia's manufacturing capacity if this goes on for more than a few months. Which in turn implies that the risk in the banking system is significantly higher than most people expect.

The inclusion of RM25 billion loan guarantees in the 2nd stimulus package looks better by the minute, especially since it will be available almost immediately. I'm not sure it will do more than buy a little time though.

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