PublicInvest Research

Industrial Production Index (IPI) - Poised for Continued Improvement

Publish date: Tue, 09 Apr 2024, 11:15 AM
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Malaysia's Industrial Production Index (IPI) growth increased modestly by 3.1% YoY, marking a slowdown from the 4.3% growth observed in January, yet surpassing market expectations by a considerable margin, which had anticipated a growth rate of 1.5%. The moderation was predominantly ascribed to the diminished output growth within the manufacturing sector, registering at 1.2% compared to 3.7% in January. Meanwhile, the mining sector accelerated by 8.1% YoY in February as compared to 5% in January, induced by natural gas production and crude oil & condensate output. The electricity sector ascended by 10.9% YoY in February (8.3% in January).

In 2024, we foresee improved growth prospects for the industrial sector. However, external demand remains the primary risk factor influencing the Malaysian economy. While both the government and central bank anticipate economic expansion within the range of 4-5% for the year, our outlook suggests a more conservative estimate of around 3.7%, contingent upon the magnitude of downside risks exerting notable influence.

Positive performance in domestic-oriented industries

The rise in manufacturing production is primarily attributed to domestic- oriented industries, which experienced a sustained growth of 3.8% during the observed month, compared to 8% in January. However, export-oriented industries saw a contraction, with a YoY decline of 0.1% in February compared to +1.6% in January. As for export-oriented industries, production of electrical & electronic (E&E) products continued to remain positive at 0.3% YoY in February (0.9% in January), influenced by manufacture of computer, electronics and optical products as well as machinery and equipment. However, exports of E&E goods continued to decline by 9.8% YoY in February (-6.5% in January), despite the recent improvement in the global semiconductor market.

Meanwhile, production of other manufactured goods, such as petroleum, chemical, rubber and plastic products rose by 1.5% YoY in February, from a growth of 2.5% in January. Similarly, the output of textiles, wearing apparel, leather products and footwear fell to -2.3% YoY in February from +2.1% YoY in January amid negative production growth of wearing apparel. Meanwhile, the output of wood, furniture, paper products and printing remained positive at 1.9% YoY in February, from 6.1% in January.

In February, domestic-oriented industries demonstrated a negative trend, with the food, beverage, and tobacco subsector falling at -3.1% YoY, from +4.6% recorded in January. Similarly, production in the transport equipment and other manufacturers category remained positive at 3% YoY in February, compared to 8.9% in January.

Positive industrial activity momentum in 1H24 buoyed by base effects

Despite a marginal MoM decline, global semiconductor sales in February continued to outpace those of the same month last year, underscoring the sustained momentum in YoY growth that has characterised the market since mid-2023. Anticipating a positive trajectory, the 2024 global semiconductor market forecasts a robust recovery, poised for double-digit growth at 13.1%, outstripping earlier projections of 11.8%. This represents a pivotal juncture for Malaysia's manufacturing sector and the semiconductor industry worldwide. The anticipated upswing is particularly promising for major E&E exporters like Malaysia, given that exports of E&E products constitute over 40% of the nation's total gross exports. Furthermore, the Ministry of Finance anticipates a substantial 5.5% increase in manufactured goods exports for 2024, further underpinning the optimistic sentiment.

However, Malaysia's vulnerability to global economic fluctuations, particularly in electronics and semiconductor sectors, is underscored by anticipated modest global economic growth in 2024. Heavy reliance on key trade partners like the US, China, and the EU heightens concerns for ASEAN trade. Additionally, the major elections in significant trading partners this year, including the US, South Korea, and India, introduce further complexity, potentially shaping international trade dynamics. The escalation of the Red Sea Crisis poses a significant threat, potentially disrupting global supply chains and elevating business costs. During the initial two months of 2024, Suez Canal trade experienced a 50% decrease compared to the preceding year. Concurrently, trade via the Panama Canal witnessed a 32% decline, precipitating disruptions in supply chains and introducing distortions into pivotal macroeconomic metrics.

Despite these risks, an anticipated uptick in electronics exports and favourable base effects could partially offset negative impacts. As such, we forecast Malaysia's exports of goods and services to rebound with a growth rate of +5.4% in 2024. Moreover, the IMF anticipates a 3.1% expansion in global GDP, driven by improved growth prospects in the world's largest economies, the US and China, both of which are Malaysia’s foremost trading partners. This enhanced global economic outlook is expected to be bolstered by heightened private and public expenditures, increased labour force engagement, enhanced supply chain dynamics, and more favourable energy and commodity prices. MITI and its agency, MATRADE, maintain a cautious yet optimistic stance, remaining vigilant regarding global risks while actively seeking export opportunities in both existing and new markets, in alignment with the National Trade Blueprint.

The World Trade Organization (WTO) forecasts a 3.3% expansion in global trade for 2024, in line with a steady 2.5% global GDP growth rate. Trade is expected to outpace GDP growth in 2024, reflecting the influence of business-cycle sensitive investment and durable goods. Risks to the forecast include a potential slowdown in China and a resurgence of inflation in advanced economies, possibly necessitating prolonged higher interest rates. Conversely, rapid inflation declines, enabling an early shift from contractionary monetary policies, could lead to growth exceeding expectations.

Source: PublicInvest Research - 9 Apr 2024

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