OVERVIEW

Malaysia's Industrial Production Index (IPI) grew by 2.4% YoY in May, a smaller growth from April’s 6.1% and below market expectations of 3.5%. The growth was primarily supported by sustained momentum in the manufacturing (4.6% YoY) and electricity (4.2% YoY) sectors. Conversely, the mining sector contracted sharply by -6.9% YoY in May, following a robust 10% YoY growth in April. Looking ahead to 2024, we anticipate improved growth prospects for the industrial sector; however, external demand remains a critical risk factor that could significantly impact domestic performance.

Positive performance in export and domestic-oriented industries

The rise in manufacturing production was attributed to both domestic- and export-oriented industries. Domestic-oriented industries experienced a sustained growth of 6.4% during the observed month, compared to 9.5% in April. Similarly, export-oriented industries saw a YoY increase of 3.7% in May compared to 2.6% in April. As for export-oriented industries, production of electrical & electronic (E&E) products rose at 6.9% YoY in May (-0.8% in April), influenced by manufacture of computer, electronics and optical products, electrical equipment as well as machinery and equipment. Similarly, exports of E&E goods rose by 7.6% YoY in May (0.6% in April), amid improvement in the global semiconductor market.

Production of other manufactured goods, such as petroleum, chemical, rubber and plastic products fell by 0.1% YoY in May, from a growth of +6% in April. Meanwhile, the output of textiles, wearing apparel, leather products and footwear rose by 4.3% YoY in May from 4.2% in April. Similarly, the output of wood, furniture, paper products and printing remained positive at 3.9% YoY in May, from 7% in April.

Food, beverage, and tobacco subsector rose by 4.7% in May, slightly slower than 4.9% in April. Production in the transport equipment and other manufacturers category rose by 8.3% YoY in May, compared to 13.5% in April.

Positive industrial activity momentum in 2H24 buoyed by base effects

In May, global semiconductor sales rose by 4.1% MoM and 19.3% YoY, marking the most significant YoY increase since April 2022. The global semiconductor market has consistently grown YoY throughout each month of 2024. The Americas market, in particular, demonstrated robust performance with a remarkable 43.6% YoY sales increase. In May, the World Semiconductor Trade Statistics (WSTS) has revised its global semiconductor market growth forecast upwards to 16%, exceeding the previous estimate of 13.1%. For 2025, WSTS anticipates a growth rate of 12.5%, bringing the market to an estimated US$687bn. This optimistic outlook is particularly significant for Malaysia's manufacturing sector, where E&E exports account for over 40% of total exports. As the 10th largest global exporter of E&E products and the 6th largest exporter of semiconductors in 2023, Malaysia is poised to benefit substantially from these favourable projections. Malaysia accounts for 7% of global semiconductor trade and 13% of back-end operations.

In the near term, the elasticity of global trade in response to global output is expected to remain subdued compared to pre-pandemic levels, primarily due to tepid investment growth and widespread trade restrictions. The outlook for global trade is clouded by various downside risks, including weaker-than- expected global demand, escalating geopolitical tensions, and further disruptions in maritime transport. Upcoming elections in numerous countries add another layer of uncertainty, potentially leading to more protectionist trade policies that could dampen trade prospects and economic activity. Recent incidents such as attacks on commercial vessels in the Red Sea and climate-induced disruptions in the Panama Canal have affected maritime transit and freight rates along these crucial routes. Despite these challenges, global supply chain pressures and delivery times have not significantly worsened, with adverse effects largely confined to specific regions and industries.

Despite prevailing downside risks, an anticipated increase in electronics exports, coupled with favourable base effects, is expected to mitigate some negative impacts. We forecast Malaysia’s exports of goods and services to rise by +5.4% YoY in 2024. Additionally, we project global GDP growth to reach 3.0% in 2024. Malaysia’s high trade openness, demonstrated by a merchandise trade-to-GDP ratio of 144.7% in 2023, highlights its susceptibility to global economic fluctuations. However, Malaysia has dropped seven positions in the IMD World Competitiveness Ranking 2024, now ranking 34th out of 67 countries, down from 27th last year. Regionally, Malaysia has fallen four places in the Asia-Pacific, now ranking 10th out of 14 countries. Prime Minister Datuk Seri Anwar Ibrahim noted that the failure to implement targeted subsidies is a significant factor contributing to Malaysia's decline in the IMD World Competitiveness Rankings 2024.

The World Trade Organization (WTO) projects global merchandise trade to grow by 2.6% in 2024 and 3.3% in 2025, following a 1.2% contraction in 2023 and a 3.0% expansion in 2022 despite the Ukraine conflict. High energy prices and inflation dampened demand for trade-intensive goods last year, but as inflation eases and real household incomes improve, demand is expected to recover over the next two years. The 2023 decline masked regional variations: sharp import declines in Europe, decreases in North America, flat demand in Asia, and increases in major fuel-exporting economies. If forecasts hold, Asia is expected to drive trade volume growth in 2024 and 2025. However, considerable uncertainty persists due to global economic risks, including conflicts and protectionism, with 2024 trade growth potentially ranging from 5.8% to -1.6%.

Source: PublicInvest Research - 15 Jul 2024