OVERVIEW

Malaysia's Industrial Production Index (IPI) rose by 5.3% YoY in July, up from 5.0% YoY in June, marking its seventh consecutive month of growth and outperforming market expectations of 4.5%. This performance was underpinned by robust expansions in the manufacturing sector at 7.7% and electricity at 7.0%, while the Mining sector contracted by 5.0%. Moving into the latter part of 2024, we anticipate the industrial sector to sustain its upward momentum, supported by firm domestic demand and a gradual recovery in global markets. Nonetheless, the outlook remains clouded by external demand risks, which could weigh on Malaysia’s industrial output amid persistent global uncertainties.

Positive performance in export and domestic-oriented industries

The growth in manufacturing production in July was underpinned by gains in both domestic- and export-oriented industries, indicating a well-balanced contribution to the sector's performance. Domestic-oriented industries expanded by 7.5% YoY in July, accelerating from 4.6% in June, while export- oriented industries posted a stronger growth of 7.8% YoY, up from 5.4% in the prior month. Within the export-driven segment, production of electrical & electronic (E&E) products increased by 5% YoY in July, compared to 3.7% in June, primarily driven by higher output in computers, electronics, and optical products, alongside electrical equipment and machinery. Notably, exports of E&E goods rebounded by 2.6% YoY in July, reversing from a contraction of - 1.6% YoY in June, reflecting recovery in the global semiconductor market.

Production in other manufacturing categories, including petroleum, chemical, rubber, and plastic products, recorded a strong growth of 9.3% YoY in July, up from 7.1% in June. The textiles, wearing apparel, leather products, and footwear segment also saw a notable uptick, expanding by 7.6% YoY in July, accelerating from 2.9% in June. Meanwhile, production in the wood, furniture, paper products, and printing sector maintained solid growth, posting an 8.6% YoY increase in July, compared to 5.4% in the previous month.

The food, beverage, and tobacco subsector demonstrated further strength, rising by 10.7% YoY in July, following a 7.2% YoY growth in June. Additionally, the transport equipment and other manufacturers category reversed its previous decline, rebounding to a 4.9% YoY increase in July after a steep contraction of -4.3% in June, indicating a recovery in production activities within the sector.

Positive industrial activity momentum in 2H24 buoyed by base effects

In July, global semiconductor sales rose by 18.7% YoY and 2.7% MoM, reflecting sustained momentum in the sector's recovery. The Americas led this surge, recording a robust 40.1% YoY growth in sales. According to the World Semiconductor Trade Statistics (WSTS), the global semiconductor market is projected to expand by 16% YoY in 2024, with a further 12.5% increase anticipated in 2025. These optimistic forecasts provide a favourable outlook for Malaysia, where the electronics and electrical (E&E) sector— comprising over 40% of total exports—remains a key growth driver. As the 10th largest exporter of E&E products globally and 6th in semiconductors in 2023, Malaysia's 7% share of global semiconductor trade and 13% in back- end operations underscores its strategic position to benefit from the anticipated industry upswing.

The anticipated uptick in electronics exports, bolstered by favourable base effects, is likely to cushion some of the adverse impacts on Malaysia’s trade outlook. We project Malaysia’s exports of goods and services to grow by +5.4% YoY in 2024, underpinned by a recovery in global demand and a robust electronics sector. Malaysia’s high trade openness, as reflected in a merchandise trade-to-GDP ratio of 144.7% in 2023, underscores its vulnerability to global economic cycles, making these projections critical to the country’s economic trajectory.

Malaysia recorded a strong GDP growth of 5.9% YoY in 2Q24, marking the second consecutive quarter of robust expansion and positioning the economy to surpass BNM’s full-year GDP forecast range of 4.0% to 5.0%. The 1H24 GDP growth of 5.1% has already outpaced our full-year projection of 4.7%, indicating that economic momentum is likely to persist into 2H24. With sustained positive growth drivers, we anticipate GDP could exceed the upper bound of the official target range. As a result, we expect the government to revise its 2024 GDP growth forecast upwards during the tabling of Budget 2025 on 18 October, which could bolster investor confidence and create additional trade opportunities.

The IMF’s World Economic Outlook forecasts global trade growth at 3% in 2024 and 3.3% in 2025, despite a downward revision from earlier projections this year. This comes amid heightened cross-border trade restrictions, particularly among geopolitically disparate blocs. However, the global trade- to-GDP ratio is anticipated to remain stable. Over the next two years, trade growth is expected to gain momentum, underpinned by easing inflationary pressures and rising income levels in advanced economies, which are likely to boost real wages and, in turn, drive demand for goods, including imports.

Global goods trade extended its recovery into 3Q24, bolstered by momentum from earlier in the year following a weak 2023, according to the latest WTO Goods Trade Barometer. However, despite these positive trends, the WTO cautions that the outlook for global trade is fraught with uncertainties stemming from geopolitical tensions, regional conflicts, evolving monetary policy stances in advanced economies, and softening export orders. The upcoming WTO trade forecast, due in mid-October, is anticipated to provide a more detailed assessment of these headwinds and their potential impact on trade dynamics in the months ahead.

Source: PublicInvest Research - 11 Sep 2024