Supported by Strong Growth in the Manufacturing Sector

Growth in Malaysia’s industrial production index (IPI) improved from 1.1% yoy in June to 2.6% in July, higher than market expectations of 1.4%. While partly due to seasonal factors, the better-than-expected growth was also supported by growth in the manufacturing sector, at 5.2% yoy in July (4.5% in June). Similarly, growth in the electricity sector accelerated to 4.5% yoy in July (3% in June).

In contrast, the mining sector contracted by 5.9% yoy in July, albeit at a slower rate than the 9.4% decline in June, but it was the third consecutive month of contraction. This was due to the decline in output of natural gas during the month (-15.2% yoy vs. -15.7% in June), particularly on lower demand from Japan, which offset the strong production of crude petroleum in the same month (4.4% vs. -2.2% yoy in June).

Strong Output of Most of the Manufactured Goods in July

In tandem with higher exports in July, the higher production of the manufacturing sector was reflected in almost all its sub-components during the month. In particular, output of electrical & electronic products, which accounts for 18.2% of the total IPI, rose sharply from 5.4% yoy in June to 8% in July. This was attributed to higher output of computer, electronics & optical (9.2%), as well as electrical equipment (5.1%), despite some slowdown in output of machinery & equipment (2.8%). Exports of E&E products rose significantly from 6.8% yoy in June to 23.6% in July, on strong demand from China and the US, especially for manufactured goods. This was also consistent with healthy global semiconductor sales in July, led by higher growth in sales to China (29.4%) and the US (20.7%).

The output of petroleum, chemical, rubber & plastic products increased by 4% yoy in July (3.4% in June), led by higher output for chemicals & chemical products during the month (7.8%), followed by rubber & plastic products (5%) and basic pharmaceutical products & pharmaceutical preparations (4.7%). Other export-oriented industries in the manufacturing goods cluster, which was also supportive during the month, include wood products, furniture, paper products, and printing (6%). However, output growth in of textiles, wearing apparel, leather products & footwear slowed to 3.6% yoy in July (6.1% in June).

In the domestic-oriented industries, the manufactures of food, beverage & tobacco products contracted for the first time in 22 months since September 2016, declining by 2.8% yoy in July (3.4% in June), due mainly to the higher base effect from the same month in the previous year. However, on a month-on-month basis, growth rose from -4.8% yoy in June to 10.9% in July, in line with higher imports of consumption goods in the same month.

Likewise, output of non-metallic mineral products, basic metal & fabricated metal products improved, rising further by 5.6% yoy in July (5.2% in June). Output of transport equipment and other manufactures also improved significantly, expanding from 4.7% yoy in June to 13.5% in July. This was partly boosted by the tax holiday, following the zero GST rate from June to August 2018, where sales growth of passenger cars accelerated to 40.6% yoy in July, the highest growth reported since April 2008.

Real GDP Growth Is Estimated to Expand About 5.0% in 3Q18

In the first seven months of 2018, overall IPI growth rose by an average of 3.3% yoy, lower than 4.3% yoy in the corresponding period of 2017. July’s IPI and export growth reflected a stronger start to 3Q18, but was partially due to seasonal factors (ie, Hari Raya season). Nevertheless, we believe the IPI will be higher in 3Q18, boosted by the tax holiday as consumers would have frontloaded on their purchases. Recall that the GST was zerorated from June to August 2018, and replaced by the sales and services tax (SST) from September 2018. We expect the country’s real GDP growth to improve from 4.5% yoy in 2Q18 to about 5% for 3Q18.

For 2018, we are maintaining our forecast for the country’s real GDP growth at 5% (5.9% in 2017). We expect a relatively healthy expansion in private sector activities due to healthy growth in income and employment. Domestic demand will remain supportive of the country’s real GDP growth.

Going forward, we believe that the country’s IPI will be affected by uncertainty in its exports-oriented industries in the months ahead. There is downside risk on global growth, especially with the escalation of trade tensions between US & China, which will have negative implications for global trade growth. This was already reflected in the slowdown in export performance from South Korea, Japan and Germany in their recent trade statistics.

Source: Affin Hwang Research - 12 Sept 2018