Manufacturing Expansion Strongest Since June 2014

Malaysia’s industrial production index (IPI) rose sharply by 6.1% yoy in July (4% in June), the fastest increase in nine months on a yearly basis, The strong production in July was contributed mainly from manufacturing sector, which grew a high of 8% yoy for the month, significantly higher than 4.7% in June, the highest increase since June 2014. However, this was partly due to seasonal factor as Hari Raya fell in late June 17. Mining activity moderated to 0.2% yoy in July, after a healthy 2.1% in June, while electricity index expanded by 7.9% yoy (2.1% in June 2017). On seasonally adjusted basis, IPI extended by 1.4% mom in July. The July’s strong 8% yoy growth in the manufacturing sector was mainly driven by semiconductor production, which grew at the fastest pace in 39 months at 17.7% yoy. The overall production of electrical and electronic products rose by 10.5% yoy in July (8.3% in June 2017). At the same time, food products surged to its highest level since the rebase of IPI to year 2010, expanding by 21.5% yoy. However, the moderation of mining activity was due to crude petroleum production, which declined by 3.8% yoy (0.8% yoy in June), but being supported by mining of natural gas at 5.5% yoy, slightly higher than 4.4% yoy in June.

Maintaining Our GDP Forecast at 4.8-5.0% in 3Q17

Even though July’s IPI and export growth reflected a strong start to 2H17, we believe this may be transitory, partially distorted by seasonal factors (ie, Hari Raya season in late June 17). Based on preliminary data, with gradual slowdown in growth likely in both industrial and manufacturing production in 3Q17 from August, we estimate real GDP growth to expand by between 4.8- 5.0% yoy (5.8% in 2Q17). For 2017, we expect the country’s real GDP growth to expand by 5.2%, higher than 4.2% in 2016. On the domestic front, we expect Malaysia’s private consumption to remain resilient driven by improvement in income growth, coupled with higher tourist arrivals in 2H17. On-going implementation of infrastructure projects and capital spending in major sectors (manufacturing and services) should also be supportive of economic growth in 2H17, but at slower rate.

Source: Affin Hwang Research - 12 Sept 2017