• IPI growth rose by 1.7% yoy in December supported by manufacturing output and smaller decline in mining output
   
• On a quarterly basis, IPI growth declined by -0.3% yoy in 4Q20 (0.8% in 3Q20) due mainly to decline in mining production
   
• With industrial and mining production remaining weak, we believe Malaysia’s real GDP growth is likely to contract by around 3% estimated for 4Q20, compared to -2.7% in 3Q20. For 2020 as a whole, we expect real GDP growth to decline and average around 5.0% (4.3% in 2019).
   
• BNM will release the real GDP growth results for 4Q20 on 11 February 2021.

Higher IPI Growth in December Supported by Manufacturing Output

Malaysia’s industrial production index (IPI) rose by 1.7% yoy in December, back in positive territory after two months in contraction (-2.2% in November). This was due to the expansion of manufacturing output, which rose by 4.1% yoy in December (2.0% in November). However, mining output declined by 5.4% yoy in December, albeit a smaller decline than -15.4% in November, dragged by lower production of crude oil and condensate as well as natural gas. Growth in electricity output also declined by 0.2% yoy in December from -2.5% in November. On a month-on-month basis, IPI growth turned around and expanded by 4.7% mom in December (-2.7% in November).

Higher Manufacturing Output Supported by Export-oriented Industries

Sustained positive growth in manufacturing output was supported by higher production in export-oriented industries. Production of electrical & electronic (E&E) goods was sustained at 7.6% yoy in December (8.3% in November), led by all its major subcomponents and has remained in positive territory for seven consecutive months. This was also reflected in exports of E&E products, which expanded by 18.1% yoy in December (23.6% in November). Meanwhile, output of petroleum, chemical, rubber and plastic products expanded by 7.7% yoy in December (2.0% in November), supported by higher 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 3.3% yoy in December (2.3% in November), due to the higher production of paper and printing, reproduction of recorded media and furniture products. Output of textiles, wearing apparel, leather products & footwear also expanded by 1.3% yoy December (-4.0% in November).

For the domestic-oriented industries, production of transportation equipment and other manufactures rose by 8.4% yoy in December (6.5% yoy in November). However, output of food, beverages, and tobacco declined by 7.9% yoy in December (-8.7% in November), while output of non-metallic mineral products contracted by 1.4% yoy in December (-2.4% in November), due to declines in production of other non-metallic mineral products & fabricated metal products.

Real GDP Growth Likely to Decline by 3.0% Yoy Estimated for 4Q20

On a quarterly basis, IPI growth declined by -0.3% yoy in 4Q20 from 0.8% in 3Q20. This was weighed down by the decline in mining output, which contracted for the sixth straight quarter by 10.5% yoy in 4Q20 (-6.5% in 3Q20). Electricity output also contracted by 0.6% yoy in 4Q20 (-2.8% 3Q20). However, growth in manufacturing output remained in positive growth in 4Q20, but slowed to 2.8% (3.8% in 3Q20). For the full year, IPI growth contracted by 4.2% in 2020 compared to 2.4% in 2019.

With industrial and mining production remaining weak, we believe Malaysia’s real GDP growth is likely to contract by around 3% estimated for 4Q20, compared to -2.7% in 3Q20. For 2020 as a whole, we expect real GDP growth to decline and average around 5.0% (4.3% in 2019). BNM will release the real GDP growth results for 4Q20 on 11 February 2021.

Going into 1H2021, we expect production of the manufacturing sector to sustain in positive territory given the possibility of higher demand from advanced economies, due to recovery in global growth. We believe both exports and production of E&E products will likely benefit from global sales of semiconductors as well as higher demand from China in the months ahead. China’s Caixin General Manufacturing PMI eased to 51.5 from 53.0 in December, but remained above the 50-level mark for the ninth consecutive month. Global manufacturing PMI remained high at 53.5 in January (53.8 in December).

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. Malaysia’s manufacturing Purchasing Managers’ Index (PMI) fell to 48.9 in January (49.1 in December), as output and export orders deteriorated, amid some slowing down in domestic and external markets.

For 2021 as a whole, we are maintaining our real GDP growth to average around 6.0% (-5% in 2020). However, there is downside risk to our 2021 forecast, as the global and domestic economic outlook will still be clouded by uncertainty over the pandemic. We remain cautious on the recovery in the country’s economic growth in 1Q21, especially with the recent reimplementation of the Movement Control Order (MCO 2.0) to all states in Malaysia except for Sarawak. Based on official estimates, the domestic economy suffered economic losses by an estimated RM700m per day during MCO 2.0, as compared to the previous losses of about RM2.4bn per day during MCO in 2Q20.

Besides that, the risk of rising COVID-19 cases domestically and other regional countries could also lead to the re-imposition of stricter lockdown measures, which may impact intra-regional trade and export-oriented industries going forward. However, we believe that the eventual start of vaccine rollout in Malaysia by 2Q21 will provide some support to the economic recovery. The PERMAI stimulus package as well as accommodative monetary policy will also support the recovery of the domestic economy.

Source: Affin Hwang Research - 9 Feb 2021