IPI growth slowed to +0.6% YoY in January (Dec: +1.3% YoY), lower than the consensus estimate of +0.8% YoY. Growth weakened on the back of lower mining (-3.9% YoY; Dec: -4.9% YoY), electricity (-0.01% YoY; Dec: +0.9% YoY) and moderation in manufacturing production (+2.1% YoY; Dec: +3.4% YoY). We maintain our expectation for Malaysia’s GDP to moderate to +4.1% YoY in 2020 (2019: +4.3% YoY).

DATA HIGHLIGHTS

IPI growth slowed to +0.6% YoY in January (Dec: +1.3% YoY), below the consensus estimate of +0.8% YoY. The slower growth stemmed from lower mining (-3.9% YoY; Dec: -4.9% YoY), electricity (-0.01% YoY; Dec: +0.9% YoY) and moderation in manufacturing production (+2.1% YoY; Dec: +3.4% YoY) (refer to Figure #1). Meanwhile, on a seasonally adjusted basis, IPI contracted at a marginal pace (- 0.04% MoM; Dec: -0.2% MoM). This may be due to the shorter working month.

Manufacturing production moderated to +2.1% YoY (Dec: +3.4% YoY) due to decline in domestic-oriented sector (-0.2% YoY; Dec: +3.0% YoY), the first decline since June 2016, and softer growth in export-oriented sector (+3.4% YoY; Dec: +3.6% YoY). Weakness in the domestic-oriented sector was broad-based, as production of food, beverages & tobacco sank (-5.6% YoY; Dec: +0.6% YoY) while non-metallic mineral & metal products (+3.9% YoY; Dec: +4.6% YoY) and transport equipment (+1.4% YoY; Dec: +4.7% YoY) recorded lower growth.

Growth in the export-oriented sector softened amid slower production growth in ‘wood products, furniture, paper products, printing’ (+3.0% YoY; Dec: +4.9% YoY), ‘textiles, wearing apparel, leather products and footwear’ (+3.2% YoY; Dec: +4.9% YoY) which offset the slight uptick in ‘electrical and electronics’ (+3.2% YoY; Dec: +3.1% YoY). Meanwhile, production of ‘petroleum, chemical, rubber and plastic products’ steadied (+3.6% YoY; Dec: +3.6% YoY).

Production in the mining sector extended its decline, albeit at a smaller pace (-3.9% YoY; Dec: -4.9% YoY), amid slower decline in crude petroleum (-5.9% YoY; Dec: - 6.6% YoY) and natural gas production (-2.3% YoY; Dec: -3.4% YoY). Meanwhile, on a monthly basis, crude petroleum production rebounded (+2.3%; Dec: -1.1%) while natural gas production continued to fall (-0.5%; Dec: -0.8%). Natural gas production may have been disrupted by the explosion on the Sabah-Sarawak Gas Pipeline that occurred during the month. Kebabangan gas field accounts for 10% of total gas production.

HLIB’s VIEW

In Malaysia, despite the slower pace of manufacturing production, employees engaged was sustained (+1.4% YoY; Dec: +1.4% YoY) while wages paid edged marginally lower (+4.1% YoY; Dec: +4.2% YoY). In February, Malaysia’s manufacturing PMI retreated further into negative territory (48.5; Jan: 48.8) due mainly to supply disruptions from China amid the COVID-19 outbreak. On the global front, manufacturing PMI dropped to its lowest level since May 2009 (47.2; Jan: 50.4) as output and new orders contracted. New export orders also contracted further, indicating prolonged weakness in international trade flows. Weakness in the manufacturing sector is expected to persist throughout 1H20 as new COVID-19 cases outside of China continue to rise, posing further downside risks to both global manufacturing and services activities. Consequently, we see downside risk to our 4.1% YoY GDP and now expect growth to come in closer to 3.0% YoY.

Source: Hong Leong Investment Bank Research - 16 Mar 2020