Data Highlights

• Malaysia's Industrial Production Index (IPI) has recorded a notable rise of 5.0% YoY to 34.3 points and surpassed consensus forecast of 4.2% YoY. On a monthly basis, the index exhibited a robust increase of 4.8% (May24: 3.5% MoM).

• The manufacturing component, which makes up a substantial 65.9% share of the IPI, increased by 5.2% YoY during the month (6.1% MoM). Notably, the sustained growth in the sector was driven by the steady performance of export-oriented industries, which rose by 5.4% YoY as compared with 3.7% YoY gain previously. Meanwhile domestic-oriented industries increased by 4.6% YoY, albeit moderating from May’s 6.4% YoY.
   
  • Export-oriented industries - The rise was primarily driven by most of the sectors, such as Manufacture of coke and refined petroleum products (Jun24: 12.5% YoY); Manufacture of vegetable and animal oils and fats (Jun24: 11% YoY); Manufacture of textiles (Jun24: 6.6% YoY); Manufacture of rubber products (Jun24: 5.9% YoY); and Manufacture of computer, electronics and optical products (Jun24: 4.95% YoY).
     
  • Domestic-oriented industries - Most of the products registered a growth, such as Manufacture of tobacco products (Jun24: 18.8% YoY); Manufacture of fabricated metal products, except machinery and equipment (Jun24: 12.6% YoY); Printing and reproduction of recorded media (Jun24: 9.8% YoY); and Manufacture of other non-metallic mineral products (Jun24: 8.9% YoY). See Figure 6 for segment performance.

• In accordance with the steady increase in manufacturing output, the sector posted a higher sales value of RM156.09bn in the latest reporting period, denoting an increase of 5.9% (May24: 5.5% YoY). The rise was primarily driven by the Electrical & electronics products sub-sector, which grew by 7.1% YoY after registering a 12.2% YoY growth in May 2024. The growth was also supported by the Food, beverages & tobacco sub-sector, with an increase of 8.6% YoY, and the Non-metallic mineral products, basic metal & fabricated metal products, which rose by 11.1%. On a MoM, the sales value grew by 0.8% from RM154.90bn in May 2024.

• At the same time, the mining output, which constitutes 25.1% of the total IPI, rebounded by 4.9% YoY in June 2024 (May24: -6.9% YoY). The moderation was mainly due to an increase in crude oil and natural gas production by 3.4% and 6.0% YoY respectively. On a MoM basis, this segment rose by 4.0%. 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, rose by 3.5% YoY (-6.2% MoM) during the month (May24: 4.5% 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

• With the steady increase in June's output, overall performance has shown significant improvement in the second quarter of the year. Total output rose by 4.5% YoY in 2Q24, compared to 3.3% YoY in the previous quarter. This positive trend was primarily driven by robust growth in the electricity sector (2Q24: 5.3% YoY; 1Q24: 9.1% YoY), the manufacturing sector (2Q24: 4.9% YoY; 1Q24: 2.1% YoY), and the mining sector (2Q24: 2.4% YoY; 1Q24: 5.9% YoY). In the first half of the year, the IPI rose by 3.9% YoY.

• Consequently, both the manufacturing and mining sectors are expected to contribute significantly to 2Q24 GDP growth. According to the DOSM Advanced Estimates, both sectors grew by 4.7% and 3.3% YoY, respectively, leading to an overall growth of 5.8% YoY in 2Q24. We maintain our GDP forecast at 5.5% YoY for 2Q24.

• In the forthcoming period, the prospect of attaining robust overall output figures is poised to present a considerable challenge in the short term. This challenge predominantly emanates from the recent moderation in the Purchasing Managers Index (PMI), which has indicated a faster deterioration in the manufacturing-sector’s operating conditions compared to the previous month. In July, the domestic market showed weakness, with new orders easing for the first time in three months. Moreover, production softened at the fastest rate in three months, and employment was scaled back for the first time in four months due to the non-replacement of voluntary leavers. The S&P Global Malaysia Manufacturing PMI fell to 49.7 in July from 49.9 in June.

• While other risks persist, such as the sluggish recovery of China's economy, we should also monitor the recent contentious US-China trade relationship. This relationship may expand US powers to restrict the export of semiconductor manufacturing equipment from certain foreign countries to Chinese chipmakers. For now, we maintain our view that the Industrial Production Index (IPI) will increase by 3.9% in 2024.

Source: TA Research - 12 Aug 2024