• IPI growth declined in November due mainly to contractions in both mining output and electricity outputs
• On a cumulative basis, growth in IPI contracted by -4.8% yoy in JanuaryNovember 2020, compared to a 2.4% yoy increase in the corresponding period of 2019.
• On a quarterly basis, growth in manufacturing output was sustained at 2.2% yoy in Oct-Nov (3.1% in 3Q20), but with mining and electricity output declining during this period, we believe Malaysia’s real GDP growth is likely to decline by between 2.5% to 3.0% in 4Q20.

Decline in IPI growth dragged by contraction in mining and electricity output

Malaysia’s industrial production index (IPI) declined by 2.2% yoy in November, remaining in negative territory for the second consecutive month (-0.5% in October). This was attributed to the contraction in mining output, which declined by 15.4% yoy in November (-10.6% in October), dragged by lower production of crude oil and condensate as well as natural gas. Growth in electricity output also declined by 2.5% in November from a positive expansion of 0.8% in October. However, growth in manufacturing output remained in positive territory, rising for the sixth consecutive month at 2.0% yoy in November, albeit at a slower pace of 2.4% in October.

On a month-on-month basis, IPI growth declined by 2.7% mom in November (+1.7% in October), possibly due the re-introduction of targeted CMCO measures in several states during the month.

Positive Manufacturing Output Supported by Export-oriented Industries

Sustained positive growth in manufacturing output was supported by steady production in export-oriented industries. Production of electrical & electronic (E&E) goods increased for the sixth consecutive month by 8.3% yoy in November (7.5% in October), led by all its major subcomponents. This was reflected in exports of E&E products, which expanded by 23.6% yoy in November (3% in October). Meanwhile, output of petroleum, chemical, rubber and plastic products expanded by 2.0% yoy in November (1.9% in October), supported by increases in production of basic pharmaceutical products & pharmaceutical preparations as well as rubber and plastic products. Output of wood products, furniture, paper products and printing rose by 2.3% yoy in November (1.5% in October), due to the higher production of paper and printing, reproduction of recorded media and furniture products. In contrast, output of textiles, wearing apparel, leather products & footwear declined by -4.0% yoy November (-2.6% in October). For the domestic-oriented industries, production of transportation equipment and other manufactures rose by 6.5% yoy in November (3.5% yoy in October), as reflected in some recovery in private consumption and domestic demand.

However, output of food, beverages, and tobacco declined by 8.7% yoy in November (3.4% in October). Output of non-metallic mineral products also contracted by 3.0% yoy in November (-2.2% in October), due to declines in production of other non-metallic mineral products & fabricated metal products.

Production of export-oriented industries likely to sustain in 4Q20 and 2021

On a cumulative basis, growth in IPI contracted by -4.8% yoy in January-November 2020, compared to a 2.4% yoy increase in the corresponding period of 2019. Manufacturing output averaged a decline of 3.3% yoy in January-November 2020 (+3.6% in January-November 2019). Meanwhile, electricity output declined by 4.0% yoy in the first eleventh months of 2020 (+3.6% in the same period last year), while mining output fell by 10.1% yoy in January-November (-1.8% in January-November 2019). On a quarterly basis, growth in total IPI declined by an average of 1.4% yoy in October-November 2020, as compared to 0.8% in 3Q20. Growth in manufacturing output was sustained at 2.2% yoy in Oct-Nov (3.1% in 3Q20), but with mining and electricity output declining in October and November period, we believe Malaysia’s real GDP growth is likely to decline by between 2.5% to 3.0% in 4Q20, as compared to -2.7% in 3Q20. For 2020 as a whole, real GDP growth is likely to decline and average around 5.0% (4.3% in 2019).

Downside Risk to Our GDP Growth Forecast for 2021 After Renewed MCO

For full-year 2021, we will revise lower our real GDP growth forecast of 6.0% (-5% estimated for 2020), subject to details of the MCO 2.0 SOPs, duration of the MCO as well as fiscal stimulus respond. The current MCO 2.0 covers 5 states and the federal territories of KL, Labuan and Putrajaya. These states placed under MCO accounted for 66.4% of Malaysia’s total GDP, which includes the two biggest contributors (Selangor and KL). Uncertainty surrounding the development of the pandemic will continue to be a downside risk to the growth outlook, especially with the resurgence of Covid-19 cases in some main trading partners such as the US and EU countries.

Nevertheless, on manufacturing production, we believe that both exports and production of E&E products will benefit from higher demand from China in the months ahead. China’s Caixin General Manufacturing PMI remained above the 50-level mark for the eighth consecutive month led by growth in output and total new work at 53.0 in December (54.9 in November). Global manufacturing PMI remained at 53.8 in December. In December, Malaysia’s manufacturing Purchasing Managers’ Index (PMI) increase to 49.1 from 48.4 in November but remained below the 50-level expansionary level for the fifth straight month. We believe the strong recovery in China’s GDP growth will support Malaysia’s manufacturing sector as well as the Asean region. Similarly, global semiconductor sales are projected to increase by 8.4% yoy in 2021 or US$469.4bn from growth of 5.1% or US$433.1bn in 2020.

However, we believe downside risk remains to our GDP growth forecast for 2021. Going forward, we believe expansionary fiscal stimulus measures from the 2021 Budget announcement and accommodative monetary policy will provide some support to the country’s domestic demand.

Source: Affin Hwang Research - 12 Jan 2021