• Malaysia’s industrial production index (IPI) rose strongly by 9.3% yoy in March from 1.5% in February, the highest growth since July 2013
• On a quarterly basis, growth in total IPI turned around from -0.4% yoy in 4Q20 to an average of 3.9% in 1Q21, due mainly to strong expansion in manufacturing output
• We expect real GDP growth to record a smaller decline in 1Q21, estimated at -1.5% (-3.4% in 4Q20), due to decline in domestic demand

Strong IPI’s growth in March due to manufacturing and electricity output

Malaysia’s industrial production index (IPI) rose strongly by 9.3% yoy in March (1.5% in February), its fourth consecutive month in positive territory. This was also the highest growth since July 2013, driven by double digit expansion in manufacturing output, which rose by 12.7% yoy in March (4.5% in February). Growth in electricity output also registered a double-digit growth of 10.3% yoy in March from -5.8% in February, its first positive increase since November 2020. However, growth in mining output declined by 1.9% yoy in March albeit a smaller decline than -6.0% in February, dragged by lower production of crude oil and condensate output. On a month-onmonth basis, IPI growth rebounded to 7.4% mom in March (-6.4% mom in February).

Production Improved in Most Domestic and Export-oriented Industries

Growth in manufacturing output was supported by production in most export- and domestic-oriented industries during the month. As for export-oriented industries, production of electrical & electronic (E&E) goods rose for the tenth straight month by 13.8% yoy in March (10.3% in February), led by positive increases in major subcomponents. This was also reflected in exports of E&E products, which expanded by 48.0% yoy in March (25.5% in February). Meanwhile, output of petroleum, chemical, rubber and plastic products expanded by 14.1% yoy in March (8.9% in February), supported by higher production of basic pharmaceutical products & pharmaceutical preparations as well as rubber and plastic products. Similarly, output of textiles, wearing apparel, leather products & footwear expanded by 9.1% yoy in March (-1.0% in February), supported by higher manufacturing of textiles and leather related products. Output of wood products, furniture, paper products and printing also increased at a double-digit growth of 11.1% in March (0.9% yoy in February), driven by higher production of paper and printing and furniture products

As for the domestic-oriented industries, transport equipment & other manufacturers recorded a strong growth of 20.9% yoy in March (3.2% in February) driven by manufacture of motor vehicles, trailers and semi-trailers. Output of food, beverages, and tobacco rebounded to a positive growth of 7.2% yoy in March (-7.4% in February), supported by manufacture in food and beverages and production of tobacco. Similarly output of non-metallic mineral products turned around to 8.0% yoy (2.7% in February), due to increase in production of fabricated metal products and basic metals.

Stronger Quarterly Growth in IPI Driven by Manufacturing Output

On a quarterly basis, growth in total IPI turned around from -0.4% yoy in 4Q20 to an average of 3.9% in 1Q21, where the sharp improvement was due mainly to strong expansion in manufacturing output, which rose by 6.8% yoy in 1Q21 (2.8% in 4Q20). Mining output declined at a slower pace of 4.1% yoy in 1Q21 (-11.1% in 4Q20). Electricity production fell by 0.1% yoy in 1Q21, albeit a smaller decline than the -0.6% in 4Q20. Our estimate shows that real GDP will likely decline by about -1.5% yoy estimated for 1Q21 (-3.4% in 4Q20), before rising sharply in 2Q21 from the low base effect in 2Q20. We believe the positive contribution to GDP growth from the manufacturing sector will be dragged by decline in mining and electricity output, as well as weaker growth in the services sector during the quarter. BNM will release the country’s 1Q21 real GDP figures on 11th May 2021.

Manufacturing output will continue to be supported by intra-regional trade

Going into 2Q21, with exports growth sustaining in positive territory from healthy demand for Malaysia’s E&E products, we believe the country’s manufacturing output will continue to expand from better overseas demand and monthly global semiconductor sales. On a quarterly basis, global sales of semiconductors rose by 17.8% yoy in 1Q21, with increases across all major regional markets. Semiconductor Industry Association (SIA) projected that global semiconductor sales will expand by 10.9% yoy in 2021 or US$488.3bn from 6.8% or US$440.4bn 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.

Malaysia’s manufacturing Purchasing Managers Index (PMI) rose strongly by 53.9 in April (49.9 in March), rising above the 50-expansion level for the first time since August 2020. Despite the recent reinstatement of MCO 3.0 in several states (including Selangor and KL), we believe the expansion in manufacturing production will be sustained from steady growth in export-oriented industries as the restriction are more targeted and business activities are mostly in operation with control SOP restriction. Selangor is the largest contributor to Malaysia’s total GDP with 24.2% followed by Kuala Lumpur with 16.4%. However, as many economic sectors and services sector are allowed to operate, we believe the impact on the economy will be less severe than last year’s MCO 1.0.

Strong External Demand Will Cushion Slower Domestic Demand

Recent economic indicators continued to show sustained recovery in global economic activity, especially in China. As China remains one of Malaysia’s main export partner accounting for 15.3% of total exports, the strong demand will support Malaysia’s exports as well as the region’s external demand, which will offset the slower growth in domestic demand in 2Q21. 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 - 7 May 2021