• IPI growth rose at a slower pace of 1.2% yoy in January, supported mainly by manufacturing output though mining and electricity output still declined
• With output of industrial and mining remaining weak, as reflected in the country’s manufacturing PMI, we estimate Malaysia’s real GDP growth will likely contract by around 2.5% for 1Q21 (-3.4% in 4Q20)
• For 2021 as a whole, we are maintaining our real GDP growth forecast of around 6.0% (-5.6% in 2020)

Sustained positive growth in IPI in January due mainly to manufacturing output

Malaysia’s industrial production index (IPI) slowed down to 1.2% yoy in January from 1.7% in December but remained in positive territory for the second consecutive month. This was due to positive expansion in manufacturing output, which rose by 3.5% yoy in January, albeit slower than 4.1% in December. However, growth in mining output declined by 4.5% yoy in January from -5.4% in December, dragged by lower production of crude oil and condensate as well as natural gas. Similarly, growth in electricity output declined by -4.6% yoy in January from -0.2% in December, remaining in negative territory for the third consecutive month. On a month-on-month basis, IPI growth slowed sharply to 0.1% mom in January (4.7% mom in December).

Manufacturing supported by most export- and domestic-oriented industries

Growth in manufacturing output was supported by production in most export- and domestic-oriented industries during the month. Production of electrical & electronic (E&E) goods rose for the eighth straight month by 7.9% yoy in January (7.6% in December), led by positive increases in its major subcomponents. This was also reflected in exports of E&E products, which expanded by 13.1% yoy in January (18.1% in December). Meanwhile, output of petroleum, chemical, rubber and plastic products slowed but expanded by 4.5% yoy in January (7.7% in December), 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 also increased but a slower pace of 2.4% yoy in January (3.3% in December), led by growth in production of paper and printing, reproduction of recorded media and furniture products. In contrast, output of textiles, wearing apparel, leather products & footwear contracted by 0.8% yoy (+1.3% in December) weighed down by lower manufacturing of wearing apparel products.

As for the domestic-oriented industries, output of food, beverages, and tobacco registered a flat growth in January (-7.9% in December) amid slower declines in food and beverages, while production of tobacco increased. In contrast, production of transportation equipment and other manufactures fell by 0.2% yoy in January (8.4% in December), while output of non-metallic mineral products contracted by 1% yoy in January (-1.4% in December), due to declines in production of fabricated metal products.

For 1Q21, We Estimated Real GDP Growth to Decline by 2.5% Yoy

The impact of MCO 2.0 has already been reflected in Malaysia’s manufacturing Purchasing Managers’ Index (PMI) during the quarter, which fell further for the second consecutive month to 47.7 in February from 48.9 in January, its lowest reading since May 2020. This was due to weaker output and softer new orders from domestic and external demand. With output of industrial and mining likely to remain weak, we estimate Malaysia’s real GDP growth will likely contract by around 2.5% for 1Q21, compared to -3.4% in 4Q20. We anticipate real GDP growth to be in contraction due to the re-instatement of the Movement Control Order (MCO 2.0) since 13 January to 4 March.

Based on official estimates, the initial economic losses per day during MCO 2.0 were estimated at RM600mn per day while in the second phase of MCO 2.0 following the reopening of more economic sectors, the economic losses were lower at RM300mn per day. MCO 2.0 has now been replaced with the Conditional MCO (CMCO) from 5 March to 18 March in Selangor, Kuala Lumpur, Penang and Johor alongside Kedah, Kelantan, Negeri Sembilan, Sarawak and Perak.

In the quarters ahead, we expect real GDP growth to likely turn positive from 2Q21 onwards, supported by recovery in economic activity with better external demand from expansion in global growth, ongoing fiscal stimulus and monetary policy measures. We also expect the rollout of vaccines to lift business and consumer sentiments, which will support economic growth in following quarters. Moreover, we continue to anticipate 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 also be supported by healthy demand for semiconductors, where global sales of semiconductors increased by 13.2% yoy in January 2021 from 8.3% in December 2020. Recall that the World Semiconductor Trade Statistics (WSTS) is projecting global semiconductor sales to increase by 8.4% yoy in 2021 or US$469.4bn from a growth of 6.5% or US$439.0bn in 2020. Furthermore, higher demand from China on the back of its sustained economic recovery will also underpin the performance of Malaysia’s manufacturing sector.

Therefore, for 2021 as a whole, we are maintaining our real GDP growth forecast to average around 6.0% (-5.6% 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. 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. Nevertheless, besides the ongoing rollout of vaccines, we expect Malaysia’s growth to be supported by ongoing expansionary fiscal measures as well as accommodative monetary policy.

Source: Affin Hwang Research - 15 Mar 2021