• Malaysia’s Industrial Production Index (IPI) grew 12.5% y/y in July 2022, faster than the 12.1% y/y in June 2022.

• Component-wise, the headline index was supported by the increase across all sectors.

• For now, we are maintaining our full-year growth projection at 6.4% in 2022 before easing to 4.8% in 2023.

Malaysia – Industrial Output Remains Robust

Highlights

For the month of July 2022, Malaysia’s industrial production index (IPI) grew 12.5% y/y, faster than the 12.1% y/y in June. This marked the second straight month of double-digit growth thanks to the lower base effects induced by the reimplementation of MCO3.0 in June 2021. We posit that the lower base narrative will continue throughout most of 3Q22.

This means that the third quarter and second half 2022 performance started off on a stronger footing, bringing the average IP growth during Jan–July to 6.6% y/y.

Component-wise, the headline index was supported by the increase in manufacturing sector at 14.9% y/y (June: 14.4% y/y), electricity at 13.2% y/y (June: 15.4% y/y), and mining at 3.2% y/y (June: 2.1% y/y).

The growth in manufacturing was led by the transport equipment & other manufactures (73.6% y/y), followed by wood products, furniture, paper products & printing (27.8% y/y) and non-metallic mineral products, basic metal & fabricated metal products (23.9% y/y). The mostly watched component electrical & electronic (E&E) expanded 17.3% y/y, higher than the 16.9% y/y in Jun22.

The growth of natural gas of 12.6% y/y bolstered the mining segment albeit being offset by an 8.6% decline of crude petroleum.

At the same time, the domestic-oriented industries grew a whopping 30.9% y/y (June: 35.5% y/y), while export-oriented industries accelerated 9.5% y/y (June: 7.8% y/y).

Key Takeaways

Looking at a month-to-month basis, the headline index fell 4.7% m/m, while manufacturing and mining segment contracted 5.7% m/m and 3.0% m/m, respectively.

Despite that, we still think there are meaningful improvements in industrial output. As of the latest data, the manufacturing sector is now 24.2% above the 2015–2019 average while the electricity segment is now 14.1% higher over the same period.

Malaysia’s July Manufacturing PMI signalled that the manufacturing sector is still performing well. The headline reading increased to 50.6 from 50.4 in the prior month, the strongest growth since April 2022, supported by strong output and new orders. However, input prices’ growth has eased, pointing towards alleviating supply pressures.

Moving forward, we are seeing more pronounced headwinds as global central banks already tightened their purse strings in an effort to bring down inflation, which in turn will dampen global demand and caused spill over effects on export-oriented industries.

Plus, the intermittent lockdowns in China due to the stringent zeroCovid policy to some extent can affect the industry’s performance as well. The downside risks also lie in the escalation of geopolitical tension between China-Taiwan. Other than that, the easing semiconductor sales can also pose some threat on Malaysia’s growth activity. For July 2022, the global semiconductor revenue increased 7.3% y/y to US$49.0 billion, the slowest pace since Dec 2020.

For now, we are maintaining our full-year growth projection at 6.4% in 2022 before easing to 4.8% in 2023.

Source: AmInvest Research - 12 Sept 2022