Output of Manufacturing and Electricity Sectors Slowed

Malaysia’s industrial production index (IPI) eased slightly to 3.9% yoy in June from 4% in May. However, this was above market expectations of a growth of 3.8%. Manufacturing output rose by a slower pace of 3.8% yoy in June from 4.2% in May. Meanwhile, growth in electricity output slowed for the second consecutive month to 1.7% yoy from 5.7% in May. As for mining output, it expanded for the third straight month to 4.6% yoy from 3% in May, its highest growth since August 2017. This was supported by higher output of natural gas (LNG).

Slower Performance of Export-oriented Industries in June

Slower growth in the manufacturing production, which accounted for 68.3% of the IPI basket, was due to lower production in export-oriented industries and most domestic-oriented industries. In export-oriented industries, lower output was reflected in electrical & electronic (E&E) products, which slowed for the second consecutive month to 3.5% yoy in June, from 3.7% in May. Slower E&E output growth was reflected in the production of all its subcomponents. This was also in line with the decline in export growth of E&E products, which fell by 6% yoy in June from an expansion of 0.6% yoy in May, its first contraction since March 2019. Output of petroleum, chemical, rubber and plastic products industries also slowed for the third straight month by 3% yoy in June from 3.2% in May, due to the lower production of chemicals and chemical products as well as rubber and plastic product. Production growth of wood products, furniture, paper products and printing also slowed to a seven-month low of 4.7% yoy in June from 6.5% in May, weighed down by lower output of all its subcomponents. Besides that, output of textile, wearing apparel, leather products and footwear industries eased to 5.5% yoy in June compared to 5.8% in May amid weaker output growth of textiles and wearing apparel.

In the domestic-oriented industry, output of food, beverages and tobacco industries slowed in June by 3.9% yoy compared to 4.4% in May, its weakest growth since January 2019 while production of transport equipment and other manufactures also moderated to 5.6% yoy in June from 6.9% in May. In contrast, output of non-metallic mineral products and basic metal & fabricated metal products expanded by 4.8% yoy in June from 3.8% in May led by higher production growth of all its subcomponents.

Malaysia’s Real GDP Growth Likely to Expand by 4.5% Yoy in 2Q19

On a quarter-on-quarter basis, IPI growth expanded by 3.9% yoy in 2Q19, from 2.7% in 1Q19, its fastest quarterly growth since 3Q17. Growth in manufacturing output also expanded at a quicker pace of 4.1% yoy in 2Q19 compared to 4% in 1Q19. Meanwhile, production of mining output turned around in 2Q19 to post a positive growth of 3.3% from -1.9% in 1Q19 following six consecutive quarters of negative growth. As for electricity output, it eased to 4.4% yoy in 2Q19 from 5.8% in 1Q19. With steady growth in total IPI, we believe Malaysia’s real GDP growth is likely to expand by 4.5% estimated for 2Q19 (4.5% in 1Q19). BNM will release the GDP results for 2Q19 on 16th August 2019.

Going forward, we expect growth in the manufacturing sector to remain healthy and continue to support real GDP growth despite the external uncertainty. However, if global demand for semiconductor sales continue to weaken in the months ahead, we expect growth in export-oriented industries to be weighed down by slower demand for E&E products. According to the Semiconductor Industry Association (SIA), global sales of semiconductors declined for the sixth consecutive month in June by 16.8% yoy from a decline of 14.6% in May. In addition, Malaysia’s manufacturing Purchasing Managers’ Index (PMI) also fell further in July to a four-month low of 47.6 from 47.8 in June, remaining below the 50-level mark since October 2018 amid weak overall demand conditions. Despite this, over the next 12 months Malaysian business expect order book volumes to pick up and support production growth. However, downside risks remain. Global manufacturing PMI declined to its lowest level since October 2012 to 49.3 in July as production and new order intakes declined further. Besides that, the external risks to global trade and investment sentiment and activity remain present due the renewed trade tensions between US and China following recent tariff threat by President Trump to impose 10% tariffs on another US$300bn worth of Chinese imports on 1 September 2019.

However, we expect Malaysia’s domestic demand to remain healthy, especially private consumption, on the back of stable labour market condition as well as some government incentives and positive impact of lower OPR supporting household income. The ongoing government development expenditure in the coming quarters will also support investment activity. Therefore, we estimate for the full year, Malaysia’s real GDP will average at 4.5% for 2019 which is within the official forecast of 4.3- 4.8% (4.7% in 2018). Furthermore, we anticipate positive expansionary fiscal measures to likely be announced in Budget 2020 (on 11 October 2019) to also support domestic demand from possible slowdown in exports.

Source: Affin Hwang Research - 13 Aug 2019