Higher manufacturing output in October, supported by E&E products

Malaysia’s industrial production index (IPI) rose by a better-than-expected 4.2% yoy in October (a revised 3.1% in September), despite the sharp contraction in export growth during the month. This was also higher than the market expectation of 3.4% and reflected in all the three main sectors of total IPI. In particular, growth in the key manufacturing sector, which accounts for 66% of total IPI, rose from 4% yoy in September to 4.2% in October, while mining output turned around from -0.3% yoy to 3.5% during the same period. However, electricity output moderated by 6.9% yoy in October (7.1% in September).

On a month-on-month comparison, the total IPI rose from 2.0% mom in September to 3.9% in October, as reflected in all three subcomponents, with a strong increase in mining output, which grew by 6.6% mom in October (1.3% in September), due to the higher output of natural gas (10% mom) and crude petroleum (3.8% mom) in October.

Output of E&E rose at fastest pace in four months

The output of electrical & electronics products (E&E), which has the second largest share in manufacturing sector, rose further to 8% yoy in October (6.5% in September), attributed to higher production of computers, electronics & optical (8.3% vs 6.5% in September), electrical equipment (7.1% vs 6.9% in September) and machinery & equipment (5.3% vs 5.6% in September). However, the increase in manufacturing production was offset by the lower output of petroleum, chemical, rubber & plastic products, which fell to 3.7% in October (4.4% in September), as reflected in lower demand from the Asean region. Production of textiles, wearing apparel, leather products & footwear also slowed from 5.9% yoy in September to 4.8% in October.

On the other hand, output of domestic-oriented industries improved in October, where production of food, tobacco & beverages rose to 2.5% yoy, after two consecutive months in negative territory (-0.9% in September). Output of non-metallic mineral products, basic metals and fabricated metal expanded by 4% yoy (3.2% in September), supported by construction activity in the country. However, output of transport equipment declined sharply by 5.4% yoy in October (0.3% in September).

Emerging divergent trend between Malaysia’s exports and production

With exports of manufactured goods slowing down sharply in October, there appears to be a divergent trend emerging between Malaysia’s exports and production of manufactured products, where we believe manufacturers may start to slow their production in anticipation of slowing external demand, especially for E&E products. This was reflected in the country’s imports of intermediate goods, a leading indicator of the performance of future exports, accounting for about 57% of the total imports, which contracted sharply from +6.2% yoy in September to -8.9% in October. However, growth in Malaysia’s output of computers, electronics and optical products will likely still be supported by global semiconductor sales in the months ahead. Growth in global semiconductor sales rose from 3.6% yoy in September to 5.1% in October.

Real GDP growth likely to expand by 4.2-4.3% in 4Q16

With healthy growth in production figures envisaged for 4Q16, we believe Malaysia’s real GDP growth is likely to mirror the decent performance in 3Q16, expanding by 4.2-4.3% for 4Q16 (4.3% in 3Q16). For 2016 as a whole, we are maintaining our real GDP growth to average around 4.2%. However, the uncertainties from the external front may put some downward pressure on Malaysia’s external trade, investment and domestic demand, where the possibility of a downgrade of Malaysia’s real GDP growth for 2017 has increased, which we are currently maintaining at 4.4%, against the official forecast of 4.0-5.0%

Source: Affin Hwang Research - 13 Dec 2016