Higher Manufacturing Output But Decline in Electricity and Mining

Growth in Malaysia’s industrial production index (IPI) slowed from 4.6% yoy in March to 4.2% in April, lower than market expectations of a 4.8% increase, with declines in both electricity and mining production. In particular, growth in the mining sector declined by 2% yoy in April (+2% in March), falling into negative territory for the first time since September 2016. This was dragged down mainly by the decline in production of crude petroleum (-6.6% yoy in April vs -2.6% in March), which reflected partly the crude oil output cut of up to 20k barrels per day (bpd) by Petronas, following OPEC’s decision. The natural gas production slowed from 7.8% yoy in March to 4.1% in April, despite higher demand for LNG from Japan during the same month. The slower IPI in April also reflected the lower output in the electricity sector, which contracted for two consecutive months, from -0.2% yoy in March to - 1.5% in April. Nonetheless, growth in the manufacturing sector, which account for about 65% of the overall IPI, continued to sustain its growth momentum, rising sharply from 5.9% yoy in March to 6.7% in April, the highest growth since December 2014, partly due to the lower base in the corresponding period of last year.

Higher Production of E&E Products Supported Manufacturing Growth

Growth in the manufacturing sector was supported mainly by output of electrical and electronic (E&E) products, which increased further by 9.7% yoy in April (8.5% in March), due to higher output of computer, electronics and optical products. This was in line with higher exports of E&E products during the month (22.2% vs 21.3% yoy in March) due to higher demand from China and Japan. This was also in tandem with the trend in global semiconductor sales, which rose sharply by 20.9% yoy to US$31.3bn in April (18.1% in March), the highest growth since September 2010, with strong sales recorded from all major countries, especially from US and China. Similarly, production of domestic-oriented industries remained strong in April, with higher output of food, beverages & tobacco, which increased sharply from 5.6% yoy in March to 15.4%. Output of non-metallic mineral products, basic metal & fabricated metal products, a measure of construction activity, also improved by 4.3% yoy in April (4% in March) due to the continuation of major construction activities in the pipeline, see Fig 2.

Recent global economic indicators showed signs of continued improvement in major OECD countries, where the global Purchasing Manager Index (PMI) remained above the 50-mark, albeit moderating slightly from 52.7 in April to 52.6 in May, indicating that global manufacturers are still cautiously optimistic on the improvement in new orders and international trade, in tandem with healthy global semiconductor sales.
 

On Malaysia’s economic growth trends, the better-than-expected economic growth in 1Q17 was boosted partly by strong growth in total investment, which was reflected in imports of capital goods, such as floating structure, oil and gas vessels and several aircrafts during the quarter. However, with the absence of large high-value imports in 2Q17, as evident in imports of capital goods, which slowed sharply from 82.4% yoy in March to 14.8% in April, we expect some normalisation in total investment growth in 2Q17 onwards. We believe Malaysia’s real GDP growth had already peaked at 5.6% yoy in 1Q17, likely the highest for the year, and that quarterly growth will likely slow to 5.2% for 2Q17, before moderating further to a range of 4.2- 4.4% projected for 2H17. We are maintaining our projection at 4.8% for fullyear 2017 (4.2% in 2016). As the IMF is projecting global GDP growth to improve from 3.5% in 2017 to 3.6% in 2018, we believe external demand for Malaysia manufactured goods will remain healthy, with real GDP growth projection at 4.9% for 2018.

Source: Affin Hwang Research - 13 Jun 2017