OVERVIEW

Malaysia's industrial production index (IPI) displayed a YoY growth of 3.1% in March, exceeding the considerably low market forecast of 0.6% amid the prevailing challenges associated with diminishing foreign demand, following February's 3.5% growth. The growth was supported by positive growth in manufacturing and mining output. Manufacturing output surged by 4.1% YoY in March compared to 4.8% in February, while mining output posted a positive YoY growth of 0.8% in March after plunging by 0.5% in February, primarily driven by crude oil and condensate production. Conversely, electricity output shrank to -0.3% YoY in March from +1.1% in February. Meanwhile, on a quarterly basis, growth in total IPI rose by 2.8% YoY in 1Q23, albeit slower than 4% in 4Q22, supported by growth in the manufacturing and mining sectors, which increased by 3.4% and 2.1%, respectively. Electricity production contracted by 1.2% YoY in 1Q23 (-1.7% in 4Q22). Consequently, we expect the pace of growth in the IPI to slow further in 1H 2023 amid weaker-than-expected global demand.

Sustained performance in both export- and domestic-oriented industries

The positive growth in manufacturing output was underpinned by production in domestic (5.0%) and export-oriented industries (3.6%) during the month. As for export-oriented industries, production of electrical & electronic (E&E) products recorded a surge of 6.4% YoY in March (5.4% YoY in February), supported by growth in manufacture of computer, electronics and optical products, electrical equipment as well as machinery and equipment. However, exports of E&E goods recorded a negative growth of 4.4% YoY in March (+11.7% in February), amid the ongoing slump in the global semiconductor market.

Meanwhile, production of other manufactured goods, such as petroleum, chemical, rubber and plastic products rose by 1.7% YoY in March, despite a marginal slowdown from 1.8% in February. The output of textiles, wearing apparel, leather products and footwear sustained at +1.9% YoY in March, amid positive production growth of wearing apparels and leather & related products. However, the output of wood products, furniture, paper products and printing declined substantially by 4.8% YoY in March, from -0.4% in February.

As for domestic-oriented industries, output in the food, beverage, and tobacco subsector rose by 7.6% YoY in March (10.4% in February). Meanwhile, production of transport equipment & other manufacturers rose +6.4% YoY in March (+8.3% in February).

Domestic economy to be supported by internally generated growth

For this year, we anticipate a shift towards an internally driven growth trajectory for Malaysia's economy, where domestic demand is bolstered by burgeoning private investment activity, catalysed by new and ongoing investments in key economic sectors. Nonetheless, we posit that the country's manufacturing sector will persist in its synchronisation with the short-term cyclical downturn of the semiconductor industry, which has continued to exhibit adverse growth trends. Our projections indicate a moderation of 4.4% in the overall manufacturing sector in 2023, compared to the official forecast of 4.0% (with a noteworthy 8.1% growth in 2022). Notably, the E&E cluster, comprising a significant portion of total exports, is poised to grow below its long-term average (2016-2019) of 6.2%, with E&E exports (accounting for 38.3% of total exports in 2022) anticipated to grow by a meagre 1.8% in 2023, compared to a robust growth of 30.2% in 2022. This further engenders apprehension about global manufacturing activity, compounded by Malaysia's manufacturing PMI still lingering below the expansionary threshold level of 50 points at 48.8 in April. Furthermore, the outlook for businesses is bleak, as companies contend with dwindling orders, both domestically and internationally. The business sentiment index continues to remain below the crucial 100-point threshold, declining precipitously from 99.8 in 3Q22 to a paltry 85.9 in 4Q22. The manufacturing industry of Malaysia is beset with headwinds, as weakened global demand and shifts in the semiconductor landscape are likely to limit exports. We anticipate that Malaysia's PMI will mirror the overall trend of the global PMI and is anticipated to persistently fall below the 50-point expansion threshold during the 1H23.

In view of the dominating downside risks stemming from external factors, we are maintaining our GDP growth projection of 3.8% for 2023, as opposed to the official forecast of about 4.5%. Nevertheless, if the global economic climate worsens further, falling below the IMF's present projection of 2.8% for 2023, Malaysia's real GDP growth could be revised lower relative to current expectations. Despite the many challenges that continue to weigh on the global economy, there is reason for optimism in the form of China's economy reopening. The resumption of economic activity in the world's second-largest economy is a positive development, as it will not only re-integrate China with the rest of the world but also ease fears of a potential recession. This is particularly beneficial for export-oriented economies that have been severely impacted by the Covid-19 pandemic, as increasing demand from China will help to sustain their economies. Although the complete effect of this development may not be immediately noticeable, it is expected to be significant in the latter part of the year. The near-term impact will likely benefit those countries that are more heavily reliant on tourism, given that the expected rise in China’s imports will be strongest for services. Nonetheless, it is important to note that the underlying basis for China's economic resurgence is not yet firmly established, and its capacity for expansion is reliant on augmenting domestic demand, especially through the enhancement of household spending. In the midst of a backdrop characterised by geopolitical tensions and external financial uncertainties, China's economic landscape reveals lingering vulnerabilities in certain indicators. While there are nascent signs of enhanced business and consumer sentiment overall, the manufacturing sector continues to grapple with the repercussions of subdued global demand and persistently high costs. To mitigate the impact on the labour market within the manufacturing sector, it is anticipated that the government will intervene by implementing fiscal stimulus measures. Furthermore, the worries of confidence in the global banking sector may yield adverse consequences, amplifying the challenges faced by Chinese manufacturers in the market for their products.

Source: PublicInvest Research - 10 May 2023