IPI growth slowed to +1.3% YoY in December (Nov: +2.1% YoY), below market expectations of +2.0% YoY. The softer growth was attributed to decline in mining (-4.9% YoY; Nov: +0.5% YoY) and slowdown in electricity production (+0.9% YoY; Nov: +1.6% YoY) which offset the pickup in manufacturing production (+3.4% YoY; Nov: +2.7% YoY). In 4Q19, IPI eased to +1.3% YoY (3Q19: +1.6% YoY) due to decline in mining (-3.4% YoY; 3Q19: -4.7% YoY) and moderation in manufacturing (+2.8% YoY; 3Q19: +3.4% YoY) and electricity production (+1.0% YoY; 3Q19: +2.1% YoY). We maintain our expectation for Malaysia’s GDP to moderate to +4.4% YoY in 2020 (2019e: +4.5% YoY).

DATA HIGHLIGHTS

IPI growth slowed to +1.3% YoY in December (Nov: +2.1% YoY), which came in below market expectations of +2.0% YoY. Growth eased on the back of decline in mining (-4.9% YoY; Nov: +0.5% YoY) and slowdown in electricity production (+0.9% YoY; Nov: +1.6% YoY) which offset the pickup in manufacturing production (+3.4% YoY; Nov: +2.7% YoY) (refer to Figure #1). Meanwhile, on a seasonally adjusted monthly basis, IPI growth weakened (-0.4%; Nov: +1.8%), driven by contraction in manufacturing (-0.5%; Nov: +0.8%) and mining production (-1.1%; Nov: +5.5%) which offset higher electricity production (+1.6%; Nov: +1.2%).

Manufacturing production rose +3.4% YoY (Nov: +2.7% YoY) due to pick up in the export-oriented sector (+3.6% YoY; Nov: +2.4% YoY), in line with the rise in export performance while the domestic-oriented sector moderated (+3.0% YoY; Nov: +3.3% YoY). Weaker growth in the domestic-oriented sector mainly stemmed from marginal growth in food, beverages & tobacco (+0.6% YoY; Nov: +2.2% YoY), offsetting higher production in non-metallic mineral & metal products (+4.6% YoY; Nov: +3.7% YoY) and transport equipment (+4.7% YoY; Nov: +4.5% YoY).

Meanwhile, growth in the export-oriented sector continued to strengthen (+3.6% YoY; Nov: +2.4% YoY), supported by higher production in ‘electrical and electronics’ (+3.1% YoY; Nov: +1.1% YoY) due largely to increase in manufacture of diodes, transistors, and consumer electronics. ‘Petroleum, chemical, rubber and plastic products’ production was also higher at +3.6% YoY (Nov: +2.7% YoY). Meanwhile, ‘textiles, wearing apparel, leather products and footwear’ (+4.9% YoY; Nov: +6.4% YoY) and ‘wood products, furniture, paper products, printing’ production (+4.9% YoY; Nov: +5.5% YoY) saw a moderation.

Production in the mining sector declined by -4.9% YoY (Nov: +0.5% YoY) following contraction in both crude petroleum (-6.6% YoY; Nov: -3.3% YoY) and natural gas production (-3.4% YoY; Nov: +3.7% YoY). Going forward, the recovery in mining sector may be delayed further due to recent explosion in the Sabah-Sarawak gas pipeline which could potentially affect natural gas production.

HLIB’s VIEW

In January 2020, Malaysia’s manufacturing PMI retreated back to contractionary territory (48.8; Nov: 50.0), mainly due to decline in export orders. This trend of declining export orders were also seen on the global front, albeit at a slower pace (49.5; Dec: 49.2), indicating continued weakness in international trade flows. Despite the positive sentiment arising from US China phase one, we opine that downside risks to manufacturing and trade activity will persist in the wake of the spread of 2019- nCov. Hence, we maintain our expectation for Malaysia’s GDP to moderate to +4.4% YoY in 2020 (2019e: +4.5% YoY).

Source: Hong Leong Investment Bank Research - 10 Feb 2020