Malaysia’s Real GDP Growth Likely to Have Slowed to 5.0-5.3% in 2Q18

Growth in Malaysia’s industrial production index (IPI) slowed sharply from 3% yoy in May to 1.1% in June, significantly lower than market expectations of 3.2%. The lower-than-expected growth was due to the sharp decline in the mining sector, which contracted further from -0.5% yoy in May to -9.4% in June, its second consecutive month of negative growth. The decline was reflected in the declines in both output of natural gas and crude petroleum. However, growth in the manufacturing sector was sustained, rising by 4.5% yoy in June (4.1% in May), which was also reflected in the recovery of Malaysia’s manufacturing PMI, up by 1.9 points to 49.5 in June. With the improvement in the manufacturing sector, growth in the electricity output rose from 2.6% yoy in May to 3% in June.

Growth in Export-oriented Industries Boosted by Output of E&E

The manufacturing output, which accounts for close to 68% of total IPI, was supported by steady growth in both export- and domestic-oriented industries. In export-oriented industries, output of electrical and electronic (E&E) products improved further from 4.8% yoy in May to 5.4% in June, due to higher production of major subcomponents, such as computers, electronics & optical (5.7%), electrical equipment (2.6%) and machinery & equipment (6.7%). The increase was also consistent with higher E&E exports in the same month, which increased from 2.1% yoy in May to 6.9%. Global semiconductor sales rose sharply by 20.5% yoy in June, its 19th

month of double-digit growth, driven by healthy sales from China (30.7%), followed by the US (26.7%) and Europe (15.9%). According to the Semiconductor Industry Association (SIA), the growth in global semiconductor sales was reflected in all major product categories. Similarly, production of textiles, wearing apparel, leather products & footwear also improved from 2.1% yoy in May to 6.1% in June. However, manufactures of petroleum, chemical, rubber & plastic products, which account for over a quarter of industrial production, slowed by 3.4% yoy in June (3.7% yoy in May), mainly due to lower output of coke & refined petroleum products (1.4% vs 3% yoy in May), as well as chemicals & chemical products (4.9% vs 5.5% yoy in May).

Meanwhile, in the domestic-oriented industries, growth in manufactures of food, beverage & tobacco products improved from 3.3% in May to 3.5% yoy in June, from higher household spending during the tax holiday period, which began in June 2018 and expected to last until at least end-August. Output of non-metallic mineral products, basic metal & fabricated metal products also improved, rising marginally by 5.2% yoy in June (5% in May), supported by ongoing projects in the construction sector. Nonetheless, output in transport equipment and other manufactures slowed slightly by 4.7% yoy in June (5% in May).

Real GDP Growth Is Expected to Expand in a Range of 5.0-5.3% in 2Q18

On a quarterly basis, the IPI growth averaged about 2.8% yoy in 2Q18, its lowest growth level since 1Q13. Growth in the manufacturing output slowed from 5.2% yoy in 1Q18 to 4.7% in 2Q18, where the higher production of exports-oriented industries was dragged down by lower domestic-oriented industry production during the quarter. We expect the country’s real GDP growth to have grown at a softer pace of 5.1-5.3%% yoy for 2Q18, as compared to 5.4% in 1Q18. For 2018, we maintain our forecast for the country’s real GDP growth to expand by 5.3%, but GDP growth could come in slightly lower than our current forecast. BNM will release the GDP results for 2Q18 on 16 August 2018 (5.9% in 2017). We expect a relatively healthy expansion in private sector activities, especially in consumer spending, which will support higher GDP growth in 3Q18, due to the tax holiday as well as healthy growth in income and employment. Domestic demand will likely remain supportive of the country’s real GDP growth. There are downside risks from the external front. Apart from uncertainty in China’s economy and growth in the emerging markets, we expect downside risks from the uncertainty over trade tension between the US and China. Recently, China’s government announced that it will retaliate and impose 25% tariffs on US$16bn worth of imports from the US from August 22 (having already imposed tariffs on US$34bn worth of US imports), matching the earlier tariff move by the US. While Malaysia’s exports and production of E&E remained healthy, we are cautious of a sharp slowdown in China’s economy, where from our analysis, a 1 percentage-point drop in its GDP growth will likely drag down Malaysia’s economic growth by 0.5 percentage points.

Source: Affin Hwang Research - 13 Aug 2018