IPI Growth Weighed Down Mainly by Decline in Mining Output

Malaysia’s industrial production index (IPI) slowed for the second consecutive month by 0.6% yoy in January from 1.3% in December, and below market expectations of a 0.8% increase. The slower IPI growth was due to a sustained decline in mining output, which contracted by 3.9% yoy in January from -4.9% in December. Growth in electricity output declined slightly by 0.01% in January from a positive expansion of 0.9% in December. Meanwhile, manufacturing output growth slowed to 2.1% yoy in January from 3.4% in December, led by slower growth in domestic-oriented and most export-oriented industries during the month.

Weaker Performance in Domestic-oriented Industries

In the export-oriented industries, output of petroleum, chemical, rubber and plastic products rose by 3.6% yoy in January (3.6% in December), due to higher production in all its subcomponents except for rubber and plastics. Similarly, production of electrical & electronic (E&E) products expanded for the second month in a row by 3.2% yoy in January (3.1% in December), led by higher output growth in computer, electronics and optical. However, we expect the increase in the output of E&E products to trend lower in February; Malaysia’s exports of E&E products had contracted at a slightly higher pace of 5.5% yoy in January (-5.4% in December). Malaysia’s manufacturing PMI also fell to 48.5 in February (from 48.8 in January) as export orders fell at its fastest rate since November 2012. If the Covid-19 outbreak is prolonged, we anticipate the domestic manufacturing sector to continue to be weighed down due to disruptions in the global supply chain, especially in the output of E&E products.

Output growth of textiles, wearing apparel, leather products and footwear slowed to 3.2% yoy in January (4.9% in December), its weakest growth since October 2018. Besides that, production growth of wood products, furniture, paper products and printing also slowed further to 3% yoy in January (4.9% in December) amid slower output of wood and products of wood as well as paper and paper products. As for the domestic-oriented industries, production of food, beverages and tobacco declined by 5.6% yoy in January from an expansion of 0.6% in December, its first contraction since December 2018 led primarily by the fall in output of food and tobacco products.

Output growth of non-metallic mineral products and basic metal & fabricated metal products slowed to 3.9% yoy in January from a six-month high of 4.6% in December, weighed down by lower output of all its sub-segments. Output growth of transport equipment and other manufactures slowed sharply to 1.4% yoy in January from 4.7% yoy in December.

Real GDP Growth Likely to Slow From 3.6% in 4Q19 to 2.5% in 1Q20

We anticipate the country’s manufacturing exports and production to slow sharply in February, as reflected in the global supply chain disruptions from the coronavirus and its impact on China's trade, as well as the plunge in global oil prices. We expect Malaysia’s real GDP growth to slow sharply from 3.6% in 4Q19 to 2.5% in 1Q20. The ongoing Covid-19 outbreak will weigh on the country’s tourism-related sectors as well as China’s economic growth, which is expected to slow sharply. Malaysia’s exports to China have grown rapidly over the years, from a share of 3.1% in 2000 to 12.5% by 2010 and 14.1% currently. IMF recently guided that it has lowered China’s GDP growth forecast to below 5.6% in 2020 which is more than 0.4 percentage points below its January projection. According to the Organisation for Economic Cooperation and Development (OECD), China’s real GDP growth is projected to grow by only 4.9% this year (from 6.1% in 2019). China’s services sector contracted sharply, as reflected in its services PMI, which fell to 26.5 in February from 51.8 in January.

We expect Malaysia’s GDP growth to slow further from 4.3% in 2019 to 3.3% for 2020, where downside risk remains. Apart from slowing manufactured exports, Malaysia’s exports are likely to be dampened in the months ahead by the weakness of nominal exports from key export commodities (due to drop in crude oil and gas prices as well as crude palm oil prices). In addition, we see lower output in the mining and quarrying sector, which is the third largest industry on the supply side, accounting for 7.1% of GDP.

Nevertheless, going forward, we believe Malaysia’s economic growth will be supported by the recently announced fiscal stimulus package worth about RM20bn, which includes measures to assist sectors and industries affected by Covid-19, especially hotels, airlines, travel companies and the tourismdependent retail industry. If implemented properly, these measures will help strengthen the country’s aggregate domestic demand, especially private consumption growth. Meanwhile, development expenditure allocated for spending on small infrastructure repair and upgrading projects will also create a multiplier effect on construction and investment activity.

Source: Affin Hwang Research - 16 Mar 2020