Slower Output Growth Reflected in Export-oriented Industries

Malaysia’s industrial production index (IPI) slowed from 4.7% yoy in September to 3.4% in October, sharply lower than market expectations of 4.1%, due to slower growth in both the manufacturing and mining sectors. However, the slowdown in total IPI growth was partly due to higher base from the corresponding period of last year. On a month-on-month basis, IPI growth turned around strongly from -0.1% mom in September to 2.7% in October, as reflected in all three sub-components, indicating that the country’s economic growth momentum will likely continue into 4Q17.

Growth in the manufacturing sector slowed down from 5.7% yoy in September to 4.2% in October, where slower growth in the production of export-oriented industries was cushioned by higher output of domesticoriented industries during the month. Healthy domestic demand in the country was also reflected in electricity production, which rose from 2.2% yoy in September to 4.6% in October. In contrast, growth in the mining sector slowed from 2.1% yoy in September to 0.8% in October, with slower production of both crude oil and natural gas, which slowed by 0.3% and 1.4% yoy respectively.

Output of Electrical and Electronic (E&E) Products Trended Lower

The slowdown in the production of export-oriented industries was reflected in the output of petroleum, chemicals, rubber and plastic products, which has the highest weightage of about 25.4% in total IPI, from 4.9% yoy in September to 2.1% in October. This was due to lower output of coke and refined petroleum products, as well of chemicals & chemical products. Similarly, growth in the output of electrical and electronics products slowed from 6.6% yoy in September to 5.9% in October. This was reflected in the subcomponents of E&E output, including computer, electronic & optical (6.2% vs 7.0% yoy in September), electrical equipment (3.8% vs 4.6% yoy in September), as well as machinery & equipment (4.1% vs 4.4% yoy in September). The slowdown was in tandem with slower growth in the exports of E&E products, from 17.7% yoy in September to 16.9% in October. However, output of textiles, wearing apparel, leather products & footwear rose from 8.6% yoy in September to 9.2% in October. Similarly, output of non-metallic mineral products, basic metal & fabricated metal products, increased by 4.8% yoy in October (4.5% in September) due to ongoing infrastructure projects in the construction sector.

Output of transport equipment and other manufacturers slowed by 4.8% yoy in October (8.2% in September), mainly due to lower output of motor vehicles, trailers and semi-trailers. This was also reflected in lower sales of passenger cars, which declined by 2.0% yoy in October, the third straight months of contraction.

Real GDP Growth Likely to Slow to 5.5% Yoy Estimated for 4Q17

As Malaysia’s manufacturing production will likely be affected by slower output in the export-oriented industries due partly to higher base effect, our estimate shows that the country’s real GDP growth is likely to register a slower growth of 5.5% yoy in 4Q17, some moderation from a high of 6.2% in 3Q17. For the full-year 2017, we are expecting GDP growth to expand strongly by 5.7%, from 4.2% in 2016, which is at the upper-end of the Government official forecast of between 5.2-5.7%. However, for 2018, we expect real GDP growth to moderate to 4.9% yoy, due to higher base in 2017.

Malaysia’s manufacturing Purchasing Managers’ Index (PMI) rose sharply by 3.4 percentage points to 52 in November (48.6 in October), the highest index recorded since April 2013. On a quarterly basis, manufacturing PMI strengthened from 48.8 in 2Q17 to 49.5 in 3Q17 and 50.3 during Oct-Nov periods, signalling continuation of the uptrend in the country’s manufacturing sector in 4Q17.

The country’s leading index (LI) remained steady at 2.6% in September, where quarterly growth doubled from 1.3% yoy in 2Q17 to 2.6% in 3Q17, which has increased for the past five quarters since 3Q16, supported by major economic indicators such as real imports of semiconductors, real imports of other metals, as well as expected manufacturing sales value. This reflects that domestic economic activities are also showing signs of sustain economic growth into 2018. The OECD Composite Leading Indicators (CLI), which is designed to give an early signals of turning points in economic activity, continued to point to steady expansion in the OECD economies. The CLI index increased by 101.1 in Oct 17, at the same level for four consecutive months, with synchronized economic expansion in most major global economies, reflecting a sustain expansion in 4Q17 and the pace of the growth momentum will likely extend into 2018. As a result, while we believe the pace of increase in Malaysia’s exports and production will be sustained, the magnitude of increase will still depend on the private final demand from the advanced economies.

Source: Affin Hwang Research - 13 Dec 2017