All Major Subcomponents of IPI Slowed In May

Malaysia’s industrial production index (IPI) slowed from 4.6% yoy in April to 3% in May, in line with market expectations, due partly to the higher base effect in the corresponding month of last year. However, on a month-onmonth basis, growth in IPI turned around from -3.5% yoy in April to 3.1% in May. The yoy slowdown in IPI growth was across the board, as growth in all subcomponents, i.e. manufacturing, mining and electricity sectors, trended lower in May. In particular, growth in mining production declined from 1.8% yoy in April to -0.5% in May, the first negative growth in three months, dragged by declining output of natural gas (-4.8% yoy vs -0.4% in April). However, production of crude petroleum rose by 4.8% yoy in May (4.4% in April).

Likewise, growth in the manufacturing sector also slowed from 5.3% yoy in April to 4.1% in May. Slower output in manufacturing and mining activities during the month also led to slower expansion in the production of electricity, which eased from 5.8% yoy in April to 2.6% in May.

Slower Manufacturing Activity Reflected Across the Major Segments

Slower growth in manufacturing output, which accounts for close to 68% of total IPI, was attributed to lower output in both export- and domestic-oriented industries. This was in tandem with the slowdown in exports growth, which slowed by 3.4% yoy in May, after rising by 14% in April. In particular, growth in the output of electronics & electrical (E&E) products slowed from 7.1% yoy in April to 4.8% in May, dragged by weaker production in all segments, including computers, electronics & optical, electrical equipment as well as machineries. This was also in consistent with the slowdown in exports of E&E products, which slowed to 2.1% yoy in May (21.3% in April). Similarly, growth in the output of petroleum, chemical, rubber & plastic products slowed from 4% yoy in April to 3.7% in May, led by chemicals & chemical products (5.5%), which offset the slight increase in output of coke & refined petroleum products (3%).

Other export-oriented industries, such as production of textiles, wearing apparel, leather products & footwear slowed from 3.9% to 2.1% during the same period. Output of wood products, furniture, paper products and printing also slowed further to 2.7% yoy in May (3.1% in April), dragged mainly by the contraction in the output of furniture products.

In the domestic-oriented industries, production of food, beverage & tobacco products slowed for second consecutive months, from 6% yoy in March to 4.6% in April and 3.3% in May, attributed mainly from lower output of food products (3.4% yoy vs 4.5% in April). Meanwhile, production of non-metallic mineral products, basic metal & fabricated metal products moderated by 5% yoy in May (5.1% in April), partly due to some slowing down in the construction sector.

Downside Risk to GDP Growth Increased Due to Trade War Concerns

On a quarterly basis, the IPI growth averaged about 3.8% yoy in April-May, slower than 3.9% in 1Q18, which will likely reflect slightly slower GDP growth in 2Q18 (estimated at 5.3% - 5.5%). For 2018, we are maintaining Malaysia’s real GDP growth to expand by 5.3% yoy, as compared to 5.9% in 2017, due partly to the higher base effect in 2017. We believe the country’s economic growth will continue to be supported by healthy private consumption, with some slowdown in private investment and export growth.

The recent global economic indicators are showing some signs of slowing down, especially growth in the OECD countries, where the OECD Composite Leading Indicator (CLI) fell below 100-level for the first time in fifteen months, posted at 99.9 in May. The trade war tension between the US, China and other major economies has escalated further, where last Friday, Trump administration has released the 205 pages document, which listed the tariffs on US$200 billion worth of Chinese goods. This will likely have some negative impact on the Malaysia’s economy, which is highly dependent on global trade activity.

Based on our rough estimation, assuming that the tariff resulted in a 10% decline in demand for Malaysia’s machinery & equipment exports by China, we believe it will lead to a lower exports activity by 0.9%. It will still be early to gauge the full impact on Malaysia’s export performance, as trade data for the month of July will only be announced in the first week of September. However, from our analysis, assuming a decline in China’s GDP by 1%, this will lead to a lower Malaysia GDP growth by 0.5%, while a 1% decline in global growth will likely drag Malaysia’s economy to fall by 1.3%.

As guided by BNM in the latest MPC statement on Asia economic growth, “the balance of risks to the outlook has tilted to the downside. The intensification of global trade tensions could affect sentiments and weigh on trade, investment and consumption. “

Source: Affin Hwang Research - 13 Jul 2018