Slower IPI Growth Performance Was Reflected Across the Board

Malaysia’s industrial production index (IPI) slowed by 4.7% yoy in September, after rising by 6.8% in August. This was lower than market expectations of 6.3% during the month. The slowdown in IPI growth was reflected across the board, as growth in all subcomponents, such as manufacturing, mining and the electricity sectors, trended lower during the month.

In mining sector, growth slowed from 5.3% yoy in August to 2.1% in September. This was attributed to lower production of natural gas, which slowed by 3.9% (14.6% yoy in August), which offset the improvement in crude petroleum production during the same month (0.7% vs -1.7% yoy in August). Meanwhile, growth in manufacturing production slowed to 5.7% yoy in September (7.6% in August). Slower growth in manufacturing activity also led to a slowdown in electricity output growth, from 3.0% yoy in August to 2.2% in September.

Most Subcomponents of Manufacturing Sector Slowed in September

Growth in manufacturing production slowed further in September, in line with slower export growth during the month, which eased from 30.9% yoy in August to 21.5%. The slowdown in the sector was reflected across major segments, led by petroleum, chemicals, rubber and plastic products, which combined to a total weightage of 25.4% in the manufacturing sector. In particular, output of coke and refined petroleum products slowed by 5.1% yoy in September (10.3% in August), as slower demand from the Asean region dragged down exports of refined petroleum products (33.5% vs 76.0% yoy in August).

Similarly, output of electrical & electronic (E&E) rose at a slower pace of 6.6% yoy in September (8.6% in August), due to lower output of computer, electronics & optical (6.9% vs 9.0% in August), electrical equipment (4.6% vs 8.4% in August), and machinery & equipment (4.4% vs 5.7% in August). This was also in tandem with Malaysia’s slower E&E export growth, which eased to 20.1% yoy in September (28.3% in August). Global semiconductor sales growth slowed from 23.9% yoy in August to 22.2% in September, due to lower sales to China and Japan, according to Semiconductor Industry Association (SIA).

As for the consumer-related sector, output of food, beverages & tobacco also slowed from 9.4% yoy growth in August to 8% in September, mainly attributed to lower production of food products. Likewise, output of transport equipment and other manufacturers slowed by 8.2% yoy in September from 9.9% in August, due to lower output of motor vehicles, trailers and semitrailers. This was also reflected in the decline in sales of passenger cars during the month (-14.4% yoy), the second contraction after a positive growth in July. According to the MIER, the latest consumer sentiment index (CSI) declined by 3.6 points to 77.1 in 3Q17 (80.7 in 2Q17), signaling a possible slowdown in sales of motor vehicles in the fourth quarter this year.

Meanwhile, for construction-related sector, output of non-metallic mineral products and basic metal and fabricated metal products expanded by 4.5% yoy in September, albeit lower than the previous month’s 7.1%. However, we believe this will likely be temporary as there are still plenty of current and upcoming construction projects in the pipeline.

Real GDP Growth Expected to Expand Strongly by 5.9% Yoy in 3Q17

On a quarter-on-quarter basis, IPI growth picked up from 4.3% yoy in 2Q17 to 5.8% in 3Q17, the strongest growth in two and a half years, reflecting higher expansion in the months of July (6.1%) and in August (6.8%). Growth was supported by all major components, including the manufacturing sector (7.1% vs 6.2% yoy in 2Q17), mining (2.5% vs -0.6% yoy in 2Q17) and electricity (4.4% vs 1.0% yoy in 2Q17). We expect real GDP growth to expand strongly by 5.9% yoy in 3Q17, higher than the 5.8% in 2Q17. The country’s 3Q17 GDP growth rate will be published by the Department of Statistics on 17 November 2017.

Going forward, we expect production of manufactured goods, including E&E output, will be sustained in the months ahead. This is likely to be based on healthy global semiconductor sales, while Malaysia’s imports of intermediate goods remained strong in 3Q17 (21% yoy vs 24.4% in 2Q17), reflecting that manufacturers are requiring intermediate inputs and likely to raise production in view of favourable overseas demand. For 2017, we are maintaining our full-year GDP growth forecast at 5.5%, as compared to the official forecast of between 5.2-5.7%. We are projecting Malaysia’s real GDP growth to slow to 4.9% in 2018, reflecting some slowdown in the country’s external demand, due to a higher base effect.

Source: Affin Hwang Research - 10 Nov 2017