Manufacturing Output Slowed But Supported by Mining and Electricity

Growth in Malaysia’s industrial production index (IPI) increased slightly from 3% yoy in February to 3.1% in March, due mainly to higher electricity output. This was lower than market expectations of 3.5% as growth in manufacturing production slowed from 4.7% yoy in February to 4.1% in March. The slower than expected growth was attributed partly to the higher base in the corresponding period of last year, as on a month-on-month basis, manufacturing production rose by 9.2% yoy in March (-9.8% in February).

Growth in mining production posted a flat growth in March, after contracted by 1.6% yoy in February. This was due to the decline in output of natural gas (-0.9% yoy in March vs -3.5% in February), which offset higher output of crude petroleum in the same month (1.1% vs 0.1% yoy in Feb). Output in electricity sector rose to a five-month high of 4.4% yoy in March (2.8% in February).

Mixed Performance in Both Export and Domestic-oriented Industries

On the manufacturing production, slower growth was due to mixed performance in the export-oriented industries. Output of electrical & electronics (E&E) products continued to expand further by 5.8% yoy in March (5.4% in February), supported by higher output of computer, electronics and optical (6.4%), electrical equipment (2.5%), and also machinery equipment (5.4%). This was in tandem with higher E&E exports, which increased by 8.7% yoy in March (-0.1% in February), due to higher demand from overseas. This was reflected in growth in global semiconductor sales, expanding steadily at 19.8% yoy in March (21% in February), which registered double digit growth for 16 straight months, on the back of healthy performance in major economies, including US, Europe and China. In addition, output of wood, furniture, paper & printing products, also registered better growth at 4.2% yoy in March, compared to 3.6% in February. Nonetheless, output of petroleum, chemical, rubber & plastic products, which has the largest weightage of 20.6% in the IPI, slowed by 1.4% yoy in March (7% yoy in February), contributed from lower production of all its sub-components. This was led by refined petroleum products, which declined by 0.9% yoy in March, followed by rubber & plastic products (2.8%), as well as chemical & chemicals products (3.8%).

On the domestic-oriented industry, production of food, beverage & tobacco products rose by 6% yoy in March (2.1% in February), while transport equipment and other manufacturers turned around from -2% yoy in February to 5.2% in March. In contrast, output of nonmetallic mineral products, basic metal & fabricated metal products, slowed from 5% yoy in February to 4.5% in March, partly from some slowdown in construction sector activity.

Some Moderation in GDP Growth Likely in 1Q18

On a quarter-on-quarter basis, IPI growth picked up from 3.5% yoy in 4Q17 to 3.9% in 1Q18. Growth in manufacturing output slowed slightly from 5.3% yoy in 4Q17 to 5.2% in 1Q18, while the decline in the growth of mining output narrowed from -1.6% to a flat growth during the same period, reflecting that real GDP growth is likely to have grown at a healthy pace of 5.5% yoy in 1Q18 (5.9% in 4Q17), supported by both exports and domestic demand. We expect manufacturing GDP growth to slow from 5.4% yoy in 4Q17 to around 5.3% range estimated for 1Q18. The GDP growth for Malaysia will be released on 17th May 2018.

Going forward, the slower growth envisaged for 2H18 (projected at 5.0% as compared to 5.5% estimated for 1H18) is mainly on account of the slower exports growth, but we expect growth in domestic demand, especially when private consumption will likely remain supportive of economic growth. In the latest MPC statement, which was published one day after GE14, Bank Negara Malaysia (BNM) remains positive on the domestic economic outlook, noting “favourable income and labour market conditions. Investment activity is projected to be sustained by implementation of ongoing infrastructure projects and capacity expansion by firms.”

We expect consumer sentiment index may likely improve further in anticipation of the removal of Goods and Services Tax (GST), where growth in the broad services sector is expected to remain steady in 2H2018, attributed to the performance in the wholesale and retail trade. For the whole year 2018, we expect real GDP growth to average around 5.3%, at the lower end of the official forecast of 5.5-6.0% (5.9% in 2017). However, the uncertainties in the global economic outlook from trade tensions between US and China will prompt some manufacturers to scale back on production in anticipation of slower demand from the advanced economies, as the Malaysian economy will not be spared from possible protectionist policies which may hurt global trade.

Source: Affin Hwang Research - 14 May 2018