IPI Growth Weighed Down by Decline in Mining Output

Malaysia’s industrial production index (IPI) slowed by 1.3% yoy in December from 2.1% in November, below market expectations of a 2% increase. The slower IPI growth was due to a 4.9% yoy decline in mining output in December (0.5% in November). Meanwhile, growth in electricity output slowed to 0.9% yoy from 1.6% in November. However, manufacturing output rose for the second consecutive month by 3.4% yoy from 2.7% in November, its highest growth since August 2019. The sustained increase in output of the manufacturing sector was driven by higher growth in some export-oriented and domestic-oriented industries during the month.

Mixed Performance in Export- and Domestic-oriented Industries

In the export-oriented industries, output of petroleum, chemical, rubber and plastic products rose for the second consecutive month to an eight-month high of 3.6% yoy in December, compared to 2.7% in November, due to higher production in coke and refined petroleum as well as rubber and plastic products. Similarly, production of electrical & electronic (E&E) products expanded by 3.1% yoy in December from 1.1% in November, led by higher growth in computer, electronics and optical as well as electrical equipment. We believe the increase in output of E&E products will likely be sustained in the months ahead as reflected in Malaysia’s exports of E&E products, which contracted at a slower pace of 5.4% yoy (-11.6% in November). 

Production growth of textiles, wearing apparel, leather products and footwear slowed to 4.9% yoy in December (6.4% in November), weighed down by lower output of wearing apparel and leather and related products. Besides that, production growth of wood products, furniture, paper products and printing also slowed to 4.9% yoy in December (5.5% in November) amid slower output of paper and paper products. As for the domestic-oriented industries, output growth of non-metallic mineral products and basic metal & fabricated metal products rose to a six-month high of 4.6% yoy in December (3.7% in November), due to higher output of all its sub-segments. Output growth of transport equipment and other manufactures rose for the second consecutive month to 4.7% yoy from 4.5% in November. In contrast, output growth of the food, beverages and tobacco industries eased to 0.6% yoy in December following the 2.2% rise in November.

Real GDP Growth Estimated at 4.5% Yoy for 4Q19

On a quarterly basis, IPI growth slowed for the second consecutive quarter to 1.3% yoy in 4Q19 from 1.6% in 3Q19. This was weighed down by lower mining output, which contracted for the second straight quarter by 3.4% yoy (-4.7% in 3Q19). Meanwhile, manufacturing and electricity output growth eased to 2.8% and 1% yoy respectively in 4Q19 (3.4% and 2.1%, respectively in 3Q19). For the full year, IPI growth expanded at a slower pace for the second year in a row to 2.4% yoy in 2019 compared to 3% in 2018. Our estimate for Malaysia’s real GDP growth in 4Q19 remains at 4.5% for 4Q19, slightly higher than 4.4% in 3Q19. For 2019 as a whole, we expect real GDP growth to average around 4.7%, similar to its pace in 2018. BNM will release the real GDP growth results for 4Q19 on 12 February 2020. For 2020, we expect the country's real GDP to expand by 4.5% yoy, lower than the current official forecast of 4.8% (4.7% in 2019). Despite healthy domestic demand from the support of Budget 2020 measures and steady labour market conditions in 2020, we believe the downside risks remain on external demand from global trade war uncertainties and the ongoing coronavirus outbreak. This will also have some negative implications on domestic economic activity, especially the tourism and retail sectors in 1H20.

Going forward, we believe the country’s E&E industry will benefit from higher overseas demand, in tandem with the projected rise in global semiconductor sales in 2020 of 5.9% yoy to US$433bn compared to the decline of 12% (US$412bn) in 2019. However, uncertainties surrounding China’s economic slowdown will remain as a headwind to Malaysia’s exports growth. Despite phase one of the trade deal, the earlier imposition of 25% tariffs by the US on US$250bn worth of Chinese imports will remain a drag on China’s economy and trade. We also believe the ongoing coronavirus outbreak will have some implications on Malaysia’s manufacturing and exports performance due to likely disruptions to the global supply chain to trade and manufacturing in anticipation of a sharper slowdown in China’s economy. Going into 2020, we expect Malaysia’s economy to rely more on internally generated growth, where growth from private investment activity needs to be stimulated effectively through the implementation of key infrastructure projects. We believe a stimulus package could be unveiled soon that will include measures to not only support private consumption but also assist private sectors such as tourism, retail trade, hotels, agriculture, and small- and medium-sized enterprises (SMEs). We believe a substantial amount of development expenditure allocated for 2020 needs to be spent and act as a buffer for the domestic economy from a possible global economic slowdown, especially if the external environment remains unfavourable for export growth.

Source: Affin Hwang Research - 10 Feb 2020