Growth Supported by Improvement in All Broad-based Sectors

Malaysia’s industrial production index (IPI) rose by 2.0% yoy in November from 0.3% in October, which was above market expectations of 1.1%. Manufacturing output rose by 2.5% yoy in November, slightly higher than the 2.2% increase in October. Meanwhile, mining output turned around to +0.5% yoy in November (-5.8% in October) after falling for four consecutive months. The overall increase in IPI growth was also attributed to higher production in electricity, which expanded from 0.5% yoy in October to 1.6% yoy in November.

Higher Production in Export- and Domestic-oriented Industries

The higher expansion of manufacturing output in November was driven by the majority of export-oriented industries as well as domestic-oriented industries. For the export-oriented industries, output of the petroleum, chemical, rubber and plastic products increased by 2.0% yoy in November, double the growth rate in October, due to higher production in all subsegments except for coke and refined petroleum products, which declined marginally by 0.1% yoy. Similarly, production of wood products, furniture, paper products and printing improved to 5.5% yoy in November from 4.6% in October, supported by better production of all its subcomponents with the exception of printing and reproduction of recorded media, which slowed to 0.1% yoy in November (2.4% in October).

Besides that, the higher growth in manufacturing output was also attributed to higher production of textiles, wearing apparel, leather products and footwear, which increased by 6.4% yoy in November (5.4% in October). Nevertheless, production of electrical & electronic (E&E) products slowed to 1.1% yoy in November from 2.4% in October, led by weaker growth in computer, electronics and optical as well as electrical equipment. However, output growth of machinery and equipment rose sharply to 6.0% yoy in November from 3.0% in October. The lower production of E&E products was reflected in its export growth which contracted by double digits of 11.6% in November after a smaller decrease of 3.2% in October.

For the domestic-oriented industries, output of the food, beverages and tobacco industries expanded by 2.2% yoy in November following a 0.8% rise in October, led by higher production in all sub-segments. Similarly, output of non-metallic mineral products and basic metal & fabricated metal products also registered higher growth of 3.7% yoy in November from 3.1% in October, due to higher output of all its sub-segments.

Real GDP Growth Is Estimated to Increase by 4.5% Yoy for 4Q19

Growth in total IPI expanded by an average of 1.2% yoy in OctoberNovember 2019, as compared to 1.6% in 3Q19. The lower quarterly growth was weighed down by the decline in mining production, which fell by 2.6% yoy in Oct-Nov (-4.6% in 3Q19). Furthermore, the manufacturing and electricity output were also slowed to 2.4% yoy (3.4% in 3Q19) and 1.1% (2.1% in 3Q19) respectively in October-November.

With slower manufacturing output as well as contraction in mining production in October-November period, we estimate Malaysia’s real GDP growth to likely expand to 4.5% for 4Q19, slightly higher than 4.4% in 3Q19. For 2019 as a whole, real GDP growth is expected to average around 4.7% (4.7% in 2018). Malaysia's manufacturing PMI returned to the 50 expansion level in December from 49.5 in November, but the sustainability of the PMI still hinges on the developments from the external front.

Going forward into 2020, we anticipate the country's real GDP growth to be lower but sustain at 4.5% yoy as compared to the official forecast of 4.8%, amid the uncertainty of an ongoing trade deal between the US and China as well as the escalation of geopolitical risk in the Middle East. We believe the impact will be towards the oil and gas industry, reflected also on Malaysia’s O&G industry and mining production. In view of the global economic uncertainty, the World Bank, in its latest report, cut Malaysia's GDP growth by 0.1ppt to 4.5% for 2020, from an earlier projection of 4.6%. It was in tandem with the slowdown in the GDP growth of the East Asia and Pacific region which is expected to slow to 5.7% in 2020 from 5.8% in 2019.

While downside risks from the external economic environment remains, the country's domestic demand is likely to remain strong in 2020. We believe growth in private consumption will continue to be the main driver of GDP growth with the assistance of a few catalysts including Bantuan Sara Hidup (BSH), Fuel Subsidies Program (FSP), higher minimum wages in selected cities/town, Malaysia@work initiative, public services bonus, tax relief as well as Visit Malaysia 2020, which is expected to provide positive impact towards tourism-related sector.

Source: Affin Hwang Research - 13 Jan 2020