OVERVIEW

Malaysia's industrial production index (IPI) growth rebounded and improved to 2.7% in October, surpassing market expectation of 2.4%. This resurgence is notably positive, particularly considering the previous month's downturn of 0.5%, amid the persistent difficulties attributed to waning foreign demand. The improvement in IPI was influenced by an 8.7% increase in the mining sector (-5.2% in September), primarily supported by the double-digit growth in crude oil & condensate. Meanwhile, manufacturing sector increased by 0.9% YoY in October as compared to 0.4% in September, while the electricity sector ascended further by 5.8% in October (2.5% in September).

During the initial ten months of this year, the YoY growth of Malaysia's IPI registered +1.0%, marking a notable drop from the +7.3% recorded in the same period in 2022. Within the first ten months of 2023, the manufacturing and electricity sectors demonstrated modest expansions of 1.1% and 2.1%, respectively, while the mining sector experienced a softer growth rate of 0.6%.

Anticipated in 4Q23, sustained positive growth in the IPI primarily stems from the base effect despite a 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 6.7% during the observed month. In contrast, the export-oriented industries continued to grapple with a persisting decline, as they registered a 1.5% contraction in October. As for export-oriented industries, production of electrical & electronic (E&E) products recorded a deterioration of -3.9% YoY in October (-2.0% in September), 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 2.3% YoY in October (-5.6% in September), 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 0.1% YoY in October, from a decline of 2.2% in September. The output of textiles, wearing apparel, leather products and footwear rose to 1.5% in October from -0.4% in September, despite negative production growth of textiles. Meanwhile, the output of wood, furniture, paper products and printing rose further by 4.8% YoY in October, from 0.5% in September.

As for domestic-oriented industries, output in the food, beverage, and tobacco subsector rose to 6.5% YoY in October (5.0% in September). Meanwhile, production of transport equipment & other manufacturers remained positive at 7.2% YoY in October (2.6% in September).

Positive momentum industrial activity in 4Q23 buoyed by base effects

In October, manufactured goods continued to exhibit a negative growth of 4.4%, despite softer than -13.8% in September. 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 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 0.7% in October. This downturn aligns with the latest World Semiconductor Trade Statistics (WSTS) projections, foreseeing a decline of 9.4% in the global semiconductor market for 2023. This decline, while notable, falls short of the earlier projected decrease of 10.3% in May.

Nevertheless, it is noteworthy that the Semiconductor Industry Association has observed a consistent MoM upswing in global semiconductor sales for the eighth consecutive month in October, demonstrating clear, positive momentum for chip demand as 2023 winds down. A robust recovery in the global semiconductor sales is anticipated for 2024, with an estimated growth rate of 13.1% (11.8% previously), indicating a potential turning point for both Malaysia's manufacturing sector and the global semiconductor industry. The Ministry of Finance also foresees a 5.5% expansion in exports of manufactured goods 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 - 12 Dec 2023