The Slowdown Was Reflected Across the Board

Growth in Malaysia’s industrial production index (IPI) slowed from 2.6% yoy in July to 2.2% yoy in August, slightly lower than market expectations of 2.3%. The lower-than-expected growth was contributed by moderate growth in all three sectors, namely manufacturing, mining and electricity.

The manufacturing sector, which has the highest share in the IPI basket, eased by 4.3% yoy in August, after expanding by 5.2% in July. Meanwhile, the mining sector declined by 4.6% yoy in August (-5.9% yoy in July), its fourth consecutive month of contraction. This was attributed to the drop in both production of crude petroleum and natural gas, which fell by 0.6% and 7.9% respectively during the month. With slower activity in both manufacturing and mining in the same month, growth in the electricity sector also moderated to 4% yoy in August (4.5% in July).

Mixed Performance in Export Oriented Industries

On manufacturing production, the slower growth can be attributed to the mixed performance in export-oriented industries. In particular, output of electrical & electronic products, which account for 18.2% of the total IPI, eased from 8% yoy in July to 4.5% yoy in August. The lower output of E&E was reflected in all its sub-components, including computer, electronics & optical (5.6%), electrical equipment (2%), as well as machinery & equipment (0.1%). Malaysia’s export growth in August also declined sharply to 0.3% yoy in August on lower demand from overseas for almost all its products. This was also consistent with some moderation shown in global semiconductor sales in August, which grew by 14.9%, as compared to 17.4% in July. By country, Japan dragged sales lower during the month.

Other export-oriented industries in the manufacturing goods cluster, which was also slower during the month, include output of petroleum, chemical, rubber & plastic products, easing by 3.5% yoy in August. This was mainly due to lower production of chemicals & chemical products (2.5%), which offset higher production of coke & refined products (3%), basic pharmaceutical products & pharmaceutical preparation (6.4%) as well as rubber & plastic products (5.6%). This was followed by textiles, wearing apparel, leather products & footwear, which eased by 2.9%. In contrast, output of wood products, furniture, paper products, and printing rose slightly by 6.3% yoy in the same month (6% in July).

In the domestic-oriented industries, after declining for the first time in 22 months in the month of July, the manufactures of food, beverage & tobacco products turned around to 2.1% in August. This was contributed by higher production of food products (2% vs -3.7% yoy in July), in line with higher imports of consumption goods (14.2% vs 11.1% yoy in July) in the same month.

However, output growth of non-metallic mineral products, basic metal & fabricated metal products slowed from 5.6% yoy in July to 4.9% yoy in August. Similarly, output growth of transport equipment and other manufactures remained high at 7.4% yoy in August, albeit lower than in the previous month, partly boosted by the tax holiday, following the zero GST rate from June to August 2018.

Steady growth in the export-oriented industries is reflecting the improvement in the country’s manufacturing PMI, which was sustained at above the 50 level (from 51.2 in August to 51.5 in September), in tandem with the global PMI of 52.2 in September (52.6 in August), while indicators like global semiconductor sales also remained steady. As global indicators continue to hold up, we believe Malaysia’s export-oriented industries will remain supportive of manufacturing production in the months ahead, where we also expect Malaysia’s export growth to recover.

Real GDP Growth Expected to Improve to 5.0% for 3Q18

Industrial production growth averaged 2.4% yoy in July-August 2018, a slight moderation from 2.8% in 2Q18, but likely to have improved in September, supported by higher activity in the manufacturing and mining industries. We believe the country's real GDP growth, which slowed to 4.5% in 2Q18, will likely recover to about 5% for 3Q18, on the back of healthy export and domestic-oriented industries. For the whole of 2018, we maintain our real GDP growth forecast of 5.0% (5.9% in 2017), and this should be sustained at 5.0% in 2019 (but with downside risks). Healthy contribution to GDP growth from the manufacturing sector would also likely be supported by the broad services sectors in 2019, driven partly by private consumption and domestic demand. The International Monetary Fund (IMF) expects global GDP growth of 3.7% yoy in 2019, lower than its earlier forecast of 3.9%. However, the global economy is still clouded by uncertainty from the sustainability of China’s economic growth, as well as the escalating tit-fortat trade war between the US and China.

Source: Affin Hwang Research - 12 Oct 2018