Stronger Growth Was Led by Manufacturing and Mining Production

Growth in Malaysia’s industrial production index (IPI) rose further from 2.3% yoy in September to 4.2% in October, higher than market expectations of 3%. This was mainly due to contribution from the manufacturing sector, which expanded by 5.4% yoy in October (4.8% in September). Similarly, mining sector turned around from -6.2% yoy in September to 1.4% in October, supported by output from both crude petroleum (0.4% vs -6.3% yoy in September) and natural gas (2.3% vs -6.2% yoy in September) in the same month. In contrast, electricity sector slowed by 2.1% yoy in October (4.2% in September), due partly to higher base in the corresponding period of last year.

Higher Growth Was Seen in Production of Export-oriented Industries

In tandem with October’s strong export performance, growth in manufacturing production also posted a steady growth of 5.4% yoy, attributed mainly from production of export-oriented industries, led by higher output of E&E products, rising from 5.5% yoy in September to 7.1% in October. Higher E&E products output was due to increase production of computer, electronics and optical products (8% yoy), electrical equipment (2.9%), as well as machinery and equipment (4.5%). This was also consistent with exports of E&E, which rose sharply by 23.3% yoy in October (6.5% in September) on higher demand from major economies, including both US and China. In October, global semiconductor sales slowed by 12.7% yoy in October, as compared to 15.1% in September.

As for other export-oriented industries, output of petroleum, chemical, rubber & plastic products also increased further to 4.1% yoy in October, from 3.8% in September, driven by higher output of coke and refined petroleum products (5.1%), basic pharmaceutical products & pharmaceutical preparations (5%) and rubber and plastic products (6.6%). Aside from that, production of wood products, furniture, paper products, and printing also rose for the fifth consecutive month by 6.5% yoy in October (6.4% in September), its highest growth level since May 2017. Meanwhile, growth in textiles, wearing apparel, leather products & footwear remained flat at 2.2% yoy in October, as higher output of wearing apparel (2.1%) was dragged down by lower output of textiles (1.9%) and leather & related products (3.4%).In the domestic-oriented industries, production of food, beverages and tobacco slowed sharply from 6.9% in September to 2.6% in October, mainly attributed to the slowdown of food products (2.6%) and beverages (1.1%), while tobacco production rose by 5.6% yoy. Output growth of non-metallic mineral products, basic metal & fabricated metal products was maintained at 4.6% yoy in October, while production of transport equipment and other manufactures rose higher from 2.3% yoy in September to 10.1% in October.

Moving forward, with Malaysia’s domestic demand remaining healthy from sustained growth in both private consumption and investment, we believe that manufacturers are likely to sustain production in the domestic oriented industries, which will likely cushion for some slowdown in output from exportoriented industries, especially for E&E products. However, despite external uncertainty, we believe output of Malaysia’s export-oriented industries is unlikely to slow sharply in 2019, with the anticipated modest (and healthy) growth in the global economy, as reflected in IMF’s global growth forecast of 3.7% next year (the same rate of increase in 2018).

Real GDP Growth Is Estimated to Expand by 4.7% Yoy in 4Q18

With steady expansion in both exports and manufacturing output in October, if sustained, we believe Malaysia’s real GDP growth to likely expand by 4.7% yoy in 4Q18, higher than 4.4% in 3Q18. For 2018 as a whole, real GDP growth is likely to average around 4.8% (5.9% in 2017). Going forward, against the backdrop of modest but healthy growth in the global economy, we expect Malaysia’s real GDP growth to expand by 4.7% in 2019. On domestic demand, besides the 2019 Budget measures to support consumer spending, we remain optimistic that households will remain financially sound, supported by the country’s steady household earnings and positive employment growth. Private investment is also expected to be supported by ongoing infrastructure projects, but there are some concerns on possible cut in capital expenditure (capex) by Petronas.

On the external front, we expect Malaysia’s growth in IPI to be supported by healthy demand from advanced economies for E&E products in 2019, where in absolute term, the global semiconductor sales are projected to increase from US$477.9bn in 2018 to US$490.3bn projected for 2019, which would still mark the industry’s highest-ever annual sales. The improvement in imports of intermediate goods in October, a leading indicator of the performance of future exports, especially in imports of electronics related products, suggest possibly expectations of healthy demand for Malaysia’s manufactured goods going forward.

Source: Affin Hwang Research - 13 Dec 2018