Output of Both Manufacturing and Electricity Sectors Slowed

Malaysia’s industrial production index (IPI) inched slightly higher by 0.1 percentage point to 3% yoy in January, after slowing down to 2.9% in December (4.9% in November), but was lower than market expectations of 6.8%. The slight improvement in IPI was attributed to the sharp turnaround in the output of mining sector, from -4.1% yoy in December to 1.5% in January, supported by higher output of both crude petroleum (1.8% yoy vs -5% in December) and natural gas (1.5% yoy vs -3.2% in December).

However, growth in manufacturing production slowed from 5.3% yoy in December to 4.8% in January, but electricity output rose from 3.9% yoy to 4.3% during the same period. On a month-on-month basis, total IPI declined from 2.2% mom in December to -4.5% in January, reflecting declines in both the manufacturing and electricity sectors.

According to Department of Statistics (DOS), the latest release of the IPI figures also included rebasing and adjustment of weights for the three components from 2010 base to 2015 base. The weightage for mining sector has been reduced from 28.92% in 2010 base to 25.14% in 2015 base, while the weightage for manufacturing sector was raised from 65.89% to 68.25% and electricity sector from 5.19% to 6.61%. The higher weightage adjusted for manufacturing reflected the country’s industrial sector continuing to move away from natural-resource based economy towards the manufacturing sector as well as the services sector.

Mixed Performance in Manufacturing Sector in January

Growth in the manufacturing sector was supported by higher output of nonmetallic mineral products, basic metals as well as fabricated metals, which rose sharply by 17.2% yoy in January (4.7% in December), signalling healthy growth in the construction sector, supported by on-going infrastructure projects in the country. However, production of electrical and electronic (E&E) products slowed slightly from 4.1% yoy in December to 4% in January, as reflected in computer, electrical and optical as well as electrical equipment. This was despite higher exports of E&E products in the same month, which rose sharply from 6.3% yoy in December to 27.1% in January.

Global semiconductor sales continued to rise sharply by 22.7% yoy in January (22.5% in December), with stronger growth from all major economies, including China, the US, Japan and Europe. As a result, in tandem with healthy OECD Composite Leading Indicators (CLI) and global Purchasing Managers Index (PMI), both of which are forward-looking measures of global economic activity, we believe Malaysia’s production of key E&E products will still support output of export-oriented industries in 1H18.

In the domestic-oriented industries of the manufacturing sector, output of wood products, furniture, paper products & printing slowed by 1.3% during the month (2.6% in December). Apart from that, other components such as textiles, wearing apparel, leather products & footwear as well as coke & refined petroleum products slowed sharply by 2.9% yoy in January (7.1% in December). The consumer-related cluster in the manufacturing sector also eased in January, as reflected in output of food, beverages & tobacco, which slowed from 17% yoy in December to 14.4% in January. However, output of transport equipment and other manufacturers rose significantly from 5.4% yoy in December to 28.2% in January, supported by sharp increase in output of motor vehicles, trailers, & semi-trailers (24.2% yoy vs 1.1% in December).

Real GDP Growth Is Likely to Expand by 5.5% Yoy in 1Q18

Despite the slowdown in both industrial and manufacturing production in January, with expectations that manufacturing activity will improve in 1Q18, we estimate that the country’s real GDP growth is likely to have grown at a steady pace of 5.5% yoy estimated for 1Q18, from 5.9% in 4Q17, reflecting healthy growth in domestic demand and services sectors. However, we believe Malaysia’s real GDP growth will likely slow from 6.0% yoy in 2H17 to around 5.5% estimated for 1H18 and 5.2% estimated for 2H18, bringing full-year growth to about 5.3% projected for 2018 (5.9% in 2017), as compared to the official forecast of between 5.0-5.5%. The more moderate growth envisaged for 2H18 is partly on account of the higher base effect in the corresponding period of last year, as well as possible slower global semiconductor sales after the strong sales in 2017 and 1H18. Going forward, there are downside risks from the heavy tariffs imposed by the US on steel and aluminium, especially its negative implication on international trade. The Malaysia’s manufacturing sector will not be spared from a potential global trade war, with trade retaliation by other countries toward US, as Malaysia is also highly dependent on external demand.

Source: Affin Hwang Research - 14 Mar 2018