Growth Was Supported by Manufacturing and Mining Production

Malaysia’s industrial production index (IPI) rose by 3.4% yoy in December, compared to 2.6% in November, higher than market expectations of 2.7%. The increase in IPI was led by the turnaround in mining sector, rising from a decline of -0.7% yoy in November to 1% in December. Growth in the manufacturing sector also increased by 4.4% yoy in December from 3.7% in November. However, growth in the electricity sector slowed to 2.7% yoy in December (3.2% in November), its slowest growth since May 2018.

Output of Export-oriented Industries Lifted Manufacturing Activity

Output in the manufacturing sector in December was supported mainly by higher production in the export-oriented industries. In particular, output of electrical & electronic (E&E) products, which accounts for 18.2% of the total IPI, rose strongly to 7.2% yoy in December, from 5.3% in November, its fastest pace since July 2018. This was driven by higher output of its subcomponents, like computer, electronics and optical products (8.0% yoy), electrical equipment (4.5%), as well as machinery and equipment (4.8%). This was in tandem with higher exports of E&E products in December, which rose to 14.2% yoy, after declining by 1.6% in November.

Other export-oriented industries, which also registered increases in December, were production of wood products, furniture, paper products, and printing, which increased to 5% yoy in December (2.8% in November), led by higher output of wood & products such as wood & cork (5.5%), paper and paper products (4%) and furniture (8.2%). Similarly, output of petroleum, chemical, rubber and plastic products also expanded by 3.6% yoy from 3.4% in November, due to higher output of chemicals and chemical products (2.9%), basic pharmaceutical products & pharmaceutical preparations (8.2%) and rubber and plastic products (8.0%). In contrast, output in textiles, wearing apparel, leather products & footwear slowed to 4.2% yoy in December, after reaching a five-month high of 4.8% yoy in November, amid lower output of textiles (2.2%) and wearing apparel (6.2%). As for domesticoriented industries, production of food, beverages and tobacco remained in contraction for the second consecutive month, declining by 1.1 % yoy in December (-1.7% in November). Output of transport equipment and other manufactures moderated to 7% yoy in December from 8.3% in November. Meanwhile, output of non-metallic mineral products, basic metal & fabricated metal products remained steady at 4.1% yoy for second month in December, but was weighed down by lower output of basic metals (3.4%).

In 2019, we believe Malaysia’s manufacturing production will continue to be supported by exports of electrical and electronic products. While the Semiconductor Industry Association (SIA) noted that the growth in global semiconductor sales slowed sharply by 0.6% yoy in December from 9.8% in November, the industry posted sales of US$468.8bn in 2018, its highestever annual total and an increase of 13.7% yoy. On an annual basis, SIA projected global sales of semiconductors to increase by US$490.3bn in 2019, which should support demand for Malaysia’s E&E products.

Malaysia’s manufacturing Purchasing Managers’ Index (PMI) remained below the 50-level mark in January 2019 at 47.9, but a slight improvement following three consecutive months of declines, after reaching 46.8 in December, its lowest level since the survey began in July 2012. However, according to PMI’s survey data, despite the fall in current output volumes, business confidence strengthened to a five-month high driven by forecasts of higher demand, new projects and higher sales to overseas clients.

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

On a quarterly basis, total IPI rose by an average of 3.5% yoy in 4Q18, compared to 2.4% in 3Q18, its fastest expansion since 1Q18. Growth was led by manufacturing output, which remained steady at 4.5% yoy in 4Q18 (4.8% in 3Q18) as well as the rebound in mining output after two consecutive quarters of contractions to 0.6% yoy (-5.6% in 3Q18). On an annual basis, IPI growth slowed to 3.1% yoy in 2018 from 4.3% in 2017.

With 4Q18 industrial and manufacturing production remaining healthy, we believe Malaysia’s real GDP growth is likely to improve to 4.7% for 4Q18, compared to 4.4% in 3Q18, also supported by growth in the services sector. For 2018 as a whole, we expect real GDP growth to average around 4.8% (5.9% in 2017). BNM will release the real GDP growth results for 4Q18 on 14 February 2019. In 2019, we expect real GDP growth to expand by 4.7%, slightly lower than the official forecast of 4.9%, amid global economic uncertainties in the country’s external sector, especially from continued tensions surrounding the US-China trade war. However, we believe private consumption and private investment will be supportive of domestic demand to cushion some slowdown in exports.

Source: Affin Hwang Research - 12 Feb 2019