• Malaysia’s industrial production index (IPI) rose to 1.5% yoy in February from 1.2% in January maintaining in positive territory for the third consecutive month
• In January-February, growth in industrial production rose by 1.4% yoy compared to -0.4% in 4Q20 led by higher output in manufacturing sector, which increased from 2.8% yoy in 4Q20 to 4.0% in Jan-Feb.
• For 2021 as a whole, we are maintaining our real GDP growth forecast of around 6.0% (-5.6% in 2020)

Further positive growth in IPI in February was due to manufacturing output

Malaysia’s industrial production index (IPI) rose further by 1.5% yoy in February (1.2% in January), remaining in positive territory for the third consecutive month. This was due to the positive expansion in manufacturing output, which rose by 4.5% yoy in February, higher than 3.5% in January. However, growth in mining output declined by 6.0% yoy in February (-4.5% in January), dragged by lower production of crude oil and condensate as well as natural gas. Similarly, growth in electricity output declined by -5.8% yoy in February (-4.6% in January), and has remained in negative territory for the fourth consecutive month. On a month-on-month basis, IPI growth declined by -6.4% mom in February (0.1% mom in January).

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 ninth straight month by 10.3% yoy in February (7.9% in January), led by positive increases in major subcomponents. This was also reflected in exports of E&E products, which expanded by 25.5% yoy in February (13.1% in January). Meanwhile, output of petroleum, chemical, rubber and plastic products expanded by 8.9% yoy in February (4.5% in January), supported by higher production of basic pharmaceutical products & pharmaceutical preparations as well as rubber and plastic products. In contrast, output of textiles, wearing apparel, leather products & footwear contracted by 1.0% yoy in February (-0.8% in January) weighed down by lower manufacturing of wearing apparel products. Output of wood products, furniture, paper products and printing also decreased but a slower pace of 0.9% yoy in February (2.4% in January), dragged by lower production of paper and printing and furniture products

As for the domestic-oriented industries, output of food, beverages, and tobacco registered a sharper negative growth of 7.4% yoy in February (0.0% in January) amid slower declines in food and beverages and production of tobacco.

In contrast, production of transportation equipment and other manufactures increased by 3.2% yoy in February (-0.2% in January), while output of non-metallic mineral products contracted by 2.7% yoy in February (-1.0% in January), due to declines in production of fabricated metal products.

Real GDP Growth Is Estimated to Decline by About -2.5% Yoy in 1Q21

In January-February, growth in industrial production rose by 1.4% yoy compared to -0.4% in 4Q20 led by higher output in manufacturing sector, which increased from 2.8% yoy in 4Q20 to 4.0% in Jan-Feb. With less stringent movement restrictions for most businesses/factories in March, we believe growth in manufacturing exports and production will remain positive in 1Q21. However, we believe the contribution to GDP growth from the manufacturing sector will be dragged by decline in mining and electricity output, as well as lower growth in the services sector. Our estimate shows that real GDP will likely decline by about -2.5% yoy for 1Q21 (-3.4% in 4Q20), before rising sharply in 2Q21 from the low base effect in 2Q20.

Global Economic Activity to Support Manufacturing Production

Malaysia’s manufacturing Purchasing Managers Index (PMI) rose to 49.9 in March from 47.7 in February ending two consecutive months of declines. The increase in manufacturing PMI was supported by rises in output, while new orders hit a five-month high albeit both remaining subdued. In the coming months, with the replacement of MCO 2.0 with CMCO since 5 March to 14 April 2021, we believe the gradual pick-up in economic activity to support expansion of Malaysia’s manufacturing production. Moreover, the continuing rollout of vaccines in Malaysia and in other economies will lead to gradual easing of containment measures which will also support foreign demand and growth in the sector.

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. The International Monetary Fund (IMF) expects global GDP growth to expand by 6.0% yoy in 2021, a sharp improvement from -3.3% in 2020. IMF has upgraded global GDP growth two times by 0.8 ppt, from an initial forecast of 5.2%. We also 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 14.7% yoy in February 2021 from 13.2% in January. 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, we believe higher demand from China on the back of its sustained economic recovery will also underpin the performance of Malaysia’s manufacturing sector. For the whole of 2021, we maintain our real GDP growth forecast of 6.0%, which will be at the lower-end of the official forecast range of between 6.0 to 7.5% (-5.6% in 2020).

Source: Affin Hwang Research - 12 Apr 2021