OVERVIEW

Malaysia's industrial production index (IPI) displayed a further YoY contraction of 0.5% in September, worse than market expectations of -0.2%. This remains unfavourable following August’s negative growth of 0.3%, underscoring the persistent difficulties attributed to waning foreign demand. The decrease of IPI was influenced by 5.2% downturn in the mining sector (+0.1% in August), primarily weighed by natural gas and crude oil & condensate. Meanwhile, manufacturing sector returned to a marginal growth of 0.4% YoY in September after registering negative 0.6% in August, while the electricity sector ascended by 2.5% in September (1.9% in August).

In 3Q23, the YoY growth of Malaysia's IPI registered -0.04%, marking a notable drop from the +12.2% recorded in the same quarter in 2022. The manufacturing and mining sectors demonstrated negative growth of -0.1% and -0.4% in 3Q23, respectively, while the electricity sector experienced a softer growth rate of +2.0% in 3Q23 (+8.7% in 3Q22). In the first nine months of the year, the IPI grew at a slower rate of 0.8% YoY as compared to 7.7% during the same period of the previous year.

In 4Q23, a persisting deceleration in IPI growth is anticipated, chiefly driven by the slump in global demand. Nevertheless, we hold the expectation that the industrial sector is poised for a resurgence in 2024.

Mixed performance in export- and domestic-oriented industries

The marginal uptick in manufacturing production can be attributed primarily to the resilience of domestic-oriented industries, which posted a notable growth of 5.9% during the observed month. In contrast, the export-oriented industries continued to grapple with a persisting decline, as they registered a 2.0% contraction in September. As for export-oriented industries, production of electrical & electronic (E&E) products recorded a deterioration of -2.0% YoY in September (-3.5% in August), influenced by manufacture of computer, electronics and optical products, electrical equipment as well as machinery and equipment. Similarly, exports of E&E goods continued to decline by 5.3% YoY in September (-15.3% in August), amid the persisting downturn in the global semiconductor market.

Meanwhile, production of other manufactured goods, such as petroleum, chemical, rubber and plastic products declined by 2.2% YoY in September, from a decline of 2.4% in August. The output of textiles, wearing apparel, leather products and footwear fell further to -0.4% in September from -0.01% YoY in August, amid negative production growth of textiles. Meanwhile, the output of wood products, furniture, paper products and printing rose by 0.5% YoY in September, from 1.9% in August.

As for domestic-oriented industries, output in the food, beverage, and tobacco subsector rose to 5% YoY in September (3.8% in August). Meanwhile, production of transport equipment & other manufacturers remained positive at 2.6% YoY in September (3.5% in August).

Obscured industrial activity in 4Q23 amid subdued external demand

In September, manufactured goods continued to exhibit a concerning YoY decline of 11.8%. As for 2023 as a whole, we foresee a 6.3% contraction in gross exports, stemming from subdued external demand from key trading partners. The recently presented Budget 2024 indicates a projected 5.3% decline in exports of manufactured goods for 2023, primarily influenced by a substantial 10.4% decrease in non-E&E products, outweighing the marginal increase in E&E product exports. Nonetheless, in the short term, Malaysia's manufacturing output is poised to closely track the trajectory of global semiconductor sales, which registered a negative YoY growth rate of 4.5% in September. This downturn aligns with the World Semiconductor Trade Statistics (WSTS) projections, foreseeing a more significant double-digit decline of 10.3% in the global semiconductor market for 2023, following a modest growth of +3.3% in 2022.

Nevertheless, it is noteworthy that the Semiconductor Industry Association has observed a consistent MoM upswing in global semiconductor sales for the seventh consecutive month in September. This trend underscores the robust momentum that the chip market has sustained throughout the midyear period. A robust recovery in the global semiconductor sales is anticipated for 2024, with an estimated growth rate of 11.8%, indicating a potential turning point for both Malaysia's manufacturing sector and the global semiconductor industry. The Ministry of Finance also foresees a 5.1% expansion in gross exports in 2024.

In tandem with that, the World Trade Organization’s (WTO) growth outlook for global merchandise trade in 2023 has been revised downward, reflecting the persistent downturn that initiated in the in 4Q22. The expected growth in the volume of global merchandise trade for the year now stands at 0.8%, falling short of the previous projection of a 1.7% upturn made in April. This revised forecast is subject to a spectrum of risk factors, including the possibility of a more abrupt economic deceleration in China and a resurgence of inflation in advanced economies, potentially necessitating the prolongation of elevated interest rates. Conversely, should inflation abate swiftly, it could facilitate an earlier departure from contractionary monetary policies, potentially resulting in growth exceeding expectations. In summary, the present outlook is marked by a balanced risk profile, with nearly equitable weighting of upside and downside risks, albeit with an additional growth potential attributed to the relatively lower 2023 baseline.

Following this, WTO noted that it is anticipated that trade will gain momentum in 2024, with a forecasted growth rate of 3.3%, a marginal adjustment from the earlier estimate of 3.2% made in April, in line with a consistent GDP growth rate of 2.5%. This year's relatively subdued trade growth in comparison to GDP, followed by a reversal in 2024, aligns with the historical trends of industries sensitive to business cycles, particularly investments and durable goods. However, concerns arise as signs of supply chain fragmentation become evident, potentially posing a challenge to the relatively optimistic outlook for 2024.

Source: PublicInvest Research - 8 Nov 2023