• July IPI rebounded to +0.7% from -2.2% in June.

• Manufacturing continued to experience negative growth in July.

• Mining component saw a YoY increase of 4.2%, marking the fastest growth since January 2023.

• The electricity component also showed positive growth once again.

OVERVIEW

Malaysia’s industrial production index (IPI) rebounded slightly or to 0.7% in July, reversing a 2.2% decline in June. The positive growth was largely propelled by better output from mining (4.2%) and electricity (1.5%) sectors. The expansion of IPI was due to better domestic business activities in July. Note that domesticoriented industries rose to 6.0% in July (vs 4.1% in June) while export-oriented industries contracted to -2.7% (vs -3.9% in June).

On a MoM and seasonally-adjusted basis, IPI has shown better performance after ticking 1.7% faster, an appreciation against June (-1.7%). As of July, the IPI recorded a YTD average of 1.3%, the slowest seven-month average since 2021. Due to a more pronounced price deceleration and subdued demand outlook, we have revised our 2023 IPI forecast, lowering it from an average of 4.5% to 2.0%. Note that risks to the inflation outlook remain biased to the upside if the government's subsidy rationalization plan is implemented this year.

ANALYSIS BY SECTOR

Manufacturing. Manufacturing component remained in contraction for second month in July. Manufacturing segment growth edged down or by -0.2% in July compared to -1.6% in June as output was weighed down by weaker performance from (i) petroleum, chemical and others (July: -4.1%; June: -4.6%) and (ii) E&E (July: -1.6%; June: -3.6%). Nonetheless, it is worth to note that there are a few sub-components under manufacturing sector that showed decent growth namely (i) transport equipment (July: 8.5%; June: 1.7%), (ii) non-metallic products (July: 4.4%; June: 5.2%) as well as (iii) F&B (July: 3.9%; June: 2.9%). The uninspiring manufacturing performance during the month was in-line with the subdued Manufacturing PMI form. Note that the seasonally adjusted Manufacturing Purchasing Managers' Index (PMI) in August was still below the critical threshold of 50 points. August PMI stood at 47.8 in July, unchanged from the previous month.

Sectors reliant on exports witnessed a 2.7% decline, while industries centered on the domestic market sustained robust growth, maintaining a steady pace of 6.0%. In the short term, we expect export-driven sectors to maintain a sluggish level of output due to currency fluctuations, fluctuations in commodity prices, and political uncertainties.

Looking at US economy, we learnt that manufacturing activity in August extended its decline due to worsening business conditions. Increasing pessimism regarding the immediate future has adversely affected hiring and led to a substantial decrease in purchasing activity. We remain concern on inflation and the rise in operational expenditures, notably labor and electricity expenses. Nevertheless, market sentiment remained mixed as investors processed a wealth of economic data from both domestic and international sources.

On a MoM and seasonally-adjusted (SA) basis, manufacturing output down by - 0.9% in July, vs -1.5% in June.

Mining: In July, the mining sector experienced a significant increase in production, rising by 4.2% YoY after a 6.4% decline in June. This improvement can be attributed to stronger double-digit growth in the crude oil & condensate index, which increased by 11.8% in July (compared to -4.5% in June and 0.6% in May). However, natural gas output recorded a slight decrease in July, with a decline of 0.8% (compared to -7.8% in June and 4.5% in May).

On a MoM and seasonally adjusted (SA) basis, mining output increased significantly by 9.3%, marking a notable contrast to the -5.0% decrease observed in June.

We anticipate a more promising outlook for the mining sector in the 2H23. This optimism is primarily driven by the significant reduction in inventories, influenced by the expectation that OPEC+ will continue to limit oil supplies and speculation that the U.S. Federal Reserve will halt its aggressive interest rate hikes.

We maintain a positive view on the mining sector as we remain optimistic about the potential uptick in capital expenditure within the O&G industry. This positive outlook is based on the delayed impact of high oil prices on offshore activities.

Electricity: Electricity component delivered another positive growth of 1.5% in July, a moderate expansion compared to 2.8% in June. The expansion in electricity generation during the month was supported by further increase in electricity generation despite tepid manufacturing activities. Nonetheless, electricity output was lower on a MoM and SA-adjusted basis or to -2.0% in July compared to -1.8% in June. All in all we are cautious and less sanguine on electricity component in 2H23. This is due to anticipation of subdued worldwide demand within the electronics end market, influenced by inflationary pressures and a Chinese market recuperating at a pace slower than initially projected.

OUTLOOK

Looking at the global IPI figures, a few countries experienced a drop in output production in July. Notably, the US saw a decline of 0.2%, Singapore's output decreased by 0.9%, and Thailand's by 4.4%. These trends collectively indicate a sluggish pace of production momentum on a global scale. However, China contradicted this trend by recording an elevated industrial output of 3.7% in July. In the short term, we expect the global economic outlook to remain challenging due to heightened risks in global financial markets and ongoing geopolitical tensions.

Due to a more pronounced price deceleration and subdued domestic demand outlook, we have adjusted our 2023 forecast for the IPI, reducing it from an initial average of 4.5% to 2.0%. Note that risks to the inflation outlook remain biased to the upside if the government's subsidy rationalization plan is implemented this year.

Source: BIMB Securities Research - 12 Sept 2023