Data Highlights

• Malaysia’s Industrial Production Index (IPI) experienced a slight contraction of 0.1% YoY to 130.1 points. This is below the anticipated growth of 0.7% YoY and the 0.6% YoY expansion observed in the previous month. On a monthly basis, it fell 1.3%. 

• The manufacturing component, which makes up a substantial 65.9% share of the IPI, declined further by 1.4% YoY during the month (with a MoM decrease of 2.6%). Notably, the exportoriented industry continued to drag the overall performance during the month with a larger decline. In addition, the performance was influenced by slower performance of domesticoriented industries, which moderated during the month. 
   
  • Export-oriented industries in the country recorded a YoY decline of 4.1%, weaker than the 2.7% YoY contraction registered previously. The drop was primarily driven by numerous sectors, including the Manufacture of computer, electronics and optical products, Manufacture of textiles, Manufacture of coke and refined petroleum products and Manufacture of rubber products. The performance of these industries was in tandem with the recent poor trade performance as total exports contracted by 10% YoY during the month to RM118.45bn. 
     
  • Domestic-oriented industries moderated by 4.2% YoY, vs. 5.8% annual increase previously. Namely, most of the products registered a growth, except manufacture of basic pharmaceuticals, medicinal chemical and botanical products, which declined by 0.2% YoY as well as Manufacture of other transport equipment (-0.4% YoY) and Manufacture of motor vehicles, trailers and semi-trailers (-2.5% YoY) 

• In accordance with the decrease in manufacturing output, the sector posted a lower sales value of RM149.89bn in the latest reporting period, denoting a higher YoY decrease of 4.2% (Nov23: -2.6% YoY). The contraction in sales value was due to the continuous decline in the Petroleum, chemical, rubber & plastic products sub-sector since June 2023, which registered a contraction 13.6% YoY in December 2023. Moreover, the Electrical & electronics products sub-sector dropped by 4.6% YoY while the Food, beverages & tobacco sub-sector slipped by 2.6% YoY. As compared to the preceding month, the sales value dropped by 3.3% (Nov23: RM155.0bn). 

• In the meantime, the mining output, which constitutes 25.1% of the total IPI, rose by 2.6% YoY in December 2023 (Nov23: 1.9% YoY). The details revealed that the oil and natural gas output increased by 1.6% and 5.0% YoY, respectively as compared with the previous month’s 2.1% and 1.7% YoY, respectively. On a MoM basis, this segment rose by 2.8%. The mining sector encompasses the production of crude oil and natural gas, which accounted for 83.1% of the gross output value and 89.6% of the census value-added of the mining sector in 2015.

• The electricity index, which represents 6.6% of the total IPI, grew by 4.6% YoY (1.1% MoM) during the month (Nov23: 4.3% YoY). Moreover, the increase indicates an increasing momentum in the operations of the businesses. To note, the electricity index refers to the generation, collection, transmission, or distribution of electric energy to households, industrial, or commercial users.

Our Thoughts

• In 2023, the IPI registered a moderate expansion of 0.9%. During the same period, the manufacturing sector demonstrated a modest growth of 0.7% YoY, a decrease from the more robust 8.2% YoY recorded in 2022. Simultaneously, the mining index saw a rise of 0.8% YoY (2022: 2.2%). While the electricity index exhibited more substantial enhancement than the other two components, growth narrowed to 2.6% YoY in 2023 compared to the 3.6% YoY growth in 2022. 

• Despite the poor performance exhibited in December data, there has been a notable improvement in the final quarter of the previous year, with the IPI showing a 1.0% YoY increase, compared to a decline of -0.05% in 3Q23. Although the manufacturing sector displayed weakness in the final quarter, attributed to subdued export-oriented industries, the mining and electricity sectors exhibited encouraging YoY growth rates of 4.3% and 4.9%, respectively. This acceleration surpasses the growth recorded in the third quarter of 2023, suggesting the potential for a swifter Gross Domestic Product (GDP) growth than the 3.3% recorded in the previous quarter. This aligns with the recent GDP advanced estimate by the statistical department, estimating a 3.4% YoY growth. The final data is scheduled for release on 16th February 2024. 

Anticipating a positive trajectory for 2024, we project that a recovery in external demand coupled with global manufacturing activities will fortify Malaysia's Industrial Production Index (IPI), leading to a growth range of 3.5%-4.5%. The sustained expansion of domestic demand is expected to further contribute to the overall IPI growth this year. Our optimism is also grounded in the recent stabilisation of manufacturing activities reported in January, as highlighted in the latest Purchasing Managers' Index (PMI) reports. January's readings indicate tentative signs of improvement, with Malaysian manufacturers expressing optimism and foreseeing an uptick in demand. 

• However, it is important to acknowledge potential downside risks. The performance of the IPI may face challenges from prolonged or exacerbated overseas demand constraints, particularly concerning the sluggish economic recovery in China. Additionally, geopolitical tensions and disruptions to trade flows remain as concerns that could impact the growth trajectory.

Source: TA Research - 8 Feb 2024