Supported by Improvement in All Its Sub-components

Growth in Malaysia’s industrial production index (IPI) rose further, from 3.1% yoy in March to 4.6% in April, slightly higher than market expectations of 4.4%. Growth in all subcomponents, i.e., manufacturing, mining and the electricity sectors, trended higher in April, partly due to a lower base in the corresponding period of last year. Growth in mining production rose from a flat growth level in March to 1.8% yoy growth in April, supported by higher output of crude petroleum (up 4.4% yoy vs 1.1% in March), which helped to offset lower output of LNG in the same month (-0.4% yoy vs -0.9% in March). Output of the electricity sector expanded by 5.8% yoy in April.

Stronger Manufacturing Activity in Almost Across Major Clusters

In line with April’s export performance, growth in manufacturing production also rose sharply, from 4.1% yoy in March to 5.3% in April, reflected in the higher output of export-oriented industries. In particular, growth in the output of electronics & electrical (E&E) products rose from 5.8% yoy in March to 6.6% in April, attributed to higher output in computers, electronics & optical products (8.2%), as well as machinery & equipment (5.8%). Similarly, exports of E&E also grew sharply in the same month, rising from 8.8% yoy in March to 21.2%, due to higher overseas demand from the EU region, China and the US.

Other export-oriented industries, such as the output of petroleum, chemical, rubber & plastic products, expanded by 3% yoy in April (1.4% in March). This was led by the higher output of coke & refined petroleum products, which turned around from -0.9% yoy in March to 2.9% in April, followed by chemicals & chemicals products (6%) and basic pharmaceutical products & pharmaceutical preparations (7.5%). Likewise, the output of textiles, wearing apparel, leather products & footwear also rose by 4% yoy in April (3.5% in March). In contrast, output of wood products, furniture, paper products and printing slowed to 3.1% yoy in April, after rising by 4.2% in March, dragged by the slowdown in the output of printing & reproduction of recorded media. In the domestic-oriented industries, production of food, beverage & tobacco products slowed from 6% yoy in March to 4.8% in April, due to the lower output of food products (4.5% yoy vs 6.9% in March). Meanwhile, production of non-metallic mineral products, basic metal & fabricated metal products picked up slightly by 4.7% yoy in April (4.5% in March), albeit due to a moderation in construction sector activity, as well as due partly to a lower base effect.

Positive Start on Manufacturing GDP Growth in 2Q18

Growth in April’s IPI of 4.6% yoy was higher than the average of 3.9% in 1Q18, supported by the manufacturing sector, which also signaled a decent start for manufacturing GDP growth in 2Q18. However, this was partly due to a low base effect in April 2017, as growth in IPI may normalize and slow in the months ahead. Nevertheless, we believe growth in IPI will remain supportive from higher demand for E&E products. This was also consistent with recent data released by the Semiconductor Industrial Association (SIA), where the global semiconductor sales continued to improve further, increasing by 20.2% yoy in April as compared to 20.1% in March. Due to the strong growth in the first four months of 2018, the SIA has also revised its forecast for 2018 higher, from 7% to 12.6%, in view of the strong demand for memory and analog products.

However, the downside risk remains on the trade war tension between the US and other major economies, including China, the EU, the US, Mexico as well as Canada. In its latest Global Economic Prospects released on 5 June, the World Bank maintained its global growth outlook unchanged at 3.1% yoy for 2018, but expects growth to slow down to 3% in 2019 and 2.9% in 2020, as trade protectionism poses significant risk. Nevertheless, recent global economic indicators showed signs of steady growth in OECD countries, where the global Purchasing Manager Index (PMI) remained above the 50-mark (53.1 in May), indicating that global manufacturers are cautiously optimistic on the improvement in new orders and international trade.

Looking at Malaysia’s growth in exports and IPI for April, which expanded by a better-than-expected growth rate, we believe the weak trend seen in Malaysia’s manufacturing PMI will prove to be likely temporary. The country’s manufacturing PMI fell further from 48.6 in April to 47.6 in May, for the fourth consecutive month, and has been below the 50 level since January 2018 (averaging around 48.9 from February to May 2018).

We estimate Malaysia’s real GDP growth will likely grow by 5.5% yoy in 2Q18 (5.4% in 1Q18). For 2018, we are projecting Malaysia’s economy to expand by 5.3% yoy, as compared to 5.9% in 2017. This is due to the higher base effect in 2017, but we believe the growth will continue to be supported by strong domestic demand, with some moderation in export performance.

Source: Affin Hwang Research - 12 Jun 2018