Growth Supported by Electricity and Stable Manufacturing Output

Malaysia’s industrial production index (IPI) rose by 3.2% yoy in January, albeit slightly lower than 3.4% in December. However, this was higher than market expectations of 2.3%, supported by strong growth in the electricity sector production, from 2.7% yoy in December to 7.8% in January, its highest growth level since July 2017. The manufacturing sector, which has the highest share in the IPI basket at 68.3%, slowed to 4.2% yoy in January from 4.4% in December. Growth in the output of mining sector, however, declined by 0.9% yoy in January, reversing the positive growth of 1% in the prior month. Output in the manufacturing sector was supported by higher production in most export-oriented industries. However, output of electrical & electronic (E&E) products, which represents 18.2% of the total weight in the IPI basket, slowed to 3.9% yoy in January, following a strong growth of 7.2% in December. This was due to slower output in the sub-components, such as computers, electronics and optical products as well as machinery and equipment. This was in line with slower overseas demand, as reflected in Malaysia’s export growth of E&E products in January, which slowed from a double-digit expansion of 14.2% yoy in December to 8.2% in January.

As for other export-oriented industries, higher output was registered for petroleum, chemical, rubber and plastic products, which increased by a three-month high of 4% yoy in January (3.6% in December), led mainly by production of coke & refined petroleum products. Besides that, output of textiles, wearing apparel, leather products & footwear also rose from 4.2% yoy in December to 5.4% in January, its fastest growth level since June 2018, supported by higher output of textiles, wearing apparel and leather & related products. Similarly, production of wood products, furniture, paper products, and printing rose to 5.7% yoy in January (5% in December), led by higher output of wood & products, such as wood & cork, printing and furniture. In the domestic-oriented industries, production of food, beverages and tobacco turned around to register an increase of 2.6% yoy in January, from -1.1% in December. Output of non-metallic mineral products, basic metal & fabricated metal products also increased by 4.3% yoy in January, due to higher output of other non-metallic mineral products. Output of transport equipment and other manufactures slowed for the third straight month to 6.3% yoy in January from 7% in December.

Going forward, we believe growth in the manufacturing sector will likely remain supportive of real GDP growth in 1Q19, supported by continued steady production of the export-oriented industries. However, the expansion in IPI growth may be slower than 4Q18, as reflected in slower demand for E&E products. This was in tandem with the global semiconductor sales, which declined for the first time since July 2016 by 5.7% yoy in January, from a rise of 0.6% in December. However, the Semiconductor Industry Association (SIA) guided that the long-term outlook is still promising amid the usage of semiconductors in consumer products and future growth drivers like artificial intelligence, virtual reality, the Internet of Things as well as 5G and next-generation communication networks.

Malaysia’s manufacturing Purchasing Managers’ Index (PMI) fell to 47.6 in February from 47.9 in January, remaining below the 50-level mark in February 2019 for the fifth consecutive month. Despite the monthly weakness, according to the survey, producers’ expectations were still optimistic whereby over the next 12 months output is expect to be supported by planned new product launches. Despite concerns over the economic slowdown, major global leading economic indicators, such as the monthly global Purchasing Managers Index (PMI) and the OECD Composite Leading Index (CLI), are still pointing to a positive but slower underlying momentum in global economic activities, which will also be supported by accommodative monetary policies by the ECB and BOJ.

Malaysia’s private consumption is anticipated to be supported by the healthy rise in income and employment. In addition, government incentives to alleviate the cost of living, such as the Bantuan Sara Hidup (BSH), the monthly public transportation pass, and stable petrol prices, will also partly support consumption spending. Besides that, we believe private investment growth is projected to expand in 2019, due to a potential favourable export development and healthy economic outlook. According to MITI, investments into Malaysia will remain healthy in 2019, where it is projecting approved investments to be about RM200bn (RM201.7bn in 2018). However, uncertainties on the external front remains, and may dampen the economic outlook, especially if both US and China are not able to reach a trade deal. Malaysia’s exports to the US (9.3%) and China (12.9%) account for a cumulative 22.2% of the country’s total exports. BNM will release the 2018 Annual Report on 27 March 2019, when we expect the country’s official forecast of real GDP growth will be revised lower from the current 4.9% to a range of between 4.6%-4.9% for this year (4.7% in 2018), amid global economic uncertainties on the country’s external sector. We forecast Malaysia’s real GDP growth at 4.7% for 2019.

Source: Affin Hwang Research - 15 Mar 2019