Malaysia: January 2019 industrial production


HIGHLIGHTS

January 2019 industrial production

  • IPI growth beat expectations at 3.2% yoy in January, as a jump in electricity output and resilient manufacturing production offset declining mining output.
  • While the downturn in E&E growth was broadly in line with regional trends, the impact was neutralised by a rebound in downstream palm oil activity
  • Catalysts from the O&G sector and stabilisation of demand from China support our 2019 forecasts for IPI (+3.7%) and real GDP growth (+4.7%).

Steady growth in January industrial activity
The industrial production index (IPI) was broadly stable, rising 3.2% yoy in January (+3.4% yoy in December) and upending our expectations of a weaker reading. A contraction in mining output (-0.9% yoy vs. +1.0% yoy in December) was balanced by a jump in electricity output (+7.8% yoy in January vs. +2.7% yoy in December), the highest increase since Jul 2017. Manufacturing expansion was surprisingly resilient (+4.2% yoy vs. +4.4% yoy in December), given that factory activity in other export-driven economies generally experienced weakness in January. The seasonally-adjusted IPI growth rose 1.2% mom in January after an upward-revised growth of 0.2% mom in December.

Commitment to OPEC cuts took a toll on crude oil production
Crude petroleum output contracted in January (-2.2% yoy vs. +2.5% yoy in December) as a result of high base effect a year ago, which was insufficiently offset by a marginal increase in LNG output (+0.3% yoy in January vs. -0.2% yoy in December).

Slippage in electronics demand neutralised by palm oil rebound
E&E production growth almost halved (+3.9% yoy vs. +7.2% yoy in December) amid weakening global semiconductor sales, while output growth of motor vehicles, chemical, pharmaceutical and rubber products slowed. A rebound in vegetable, animal oil & fats output (+9.9% yoy in January vs. -9.9% yoy in December) single-handedly lifted food production expansion into positive territory. Stronger production growth was also recorded for refined petroleum products (+3.9% yoy in January vs. 1.7% yoy in December), apparel (+7.6% yoy vs. +6.2% yoy in December), textiles (+3.9% yoy vs. +2.2% yoy in December) and wood products (+6.2% yoy vs. +5.5% yoy in December).

Subdued manufacturing outlook tempered by O&G boost
Judging from continued weakness in Malaysia’s manufacturing PMI (47.6 in February vs. 47.9 in January), as well as downtrend in regional factory activity, particularly in the integrated E&E segment, we expect Malaysia’s manufacturing outlook to remain generally challenging in 1H19. However, these headwinds will be partly cushioned by a boost to the O&G sector as operations at the Pengerang Integrated Complex ramp up from late Mar and disruptions in the Sabah-Sarawak Gas Pipeline normalise by mid-2019. Barring unforeseen external shocks, we think clarity over the US and China’s trade deal, as well as the stimulus efforts to rejuvenate economic activity in China, could begin to lift regional trade and manufacturing activity in 2H19. These drivers are expected to lend support to our 2019F forecasts of industrial production of 3.7% (+3.0% in 2018) and real GDP growth of 4.7% in 2019F (+4.7% in 2018).

More positive catalysts in 2H19
While the outlook for export-oriented manufacturers remains muted in 1H19, we expect a cyclical upturn in 2H19, and a recovery in commodity output to underpin gross exports growth of 6.7% in 2019F. Risks include a sharp downturn in major economies and a re-escalation of US-China trade tensions, against current expectations of a rollback in tariffs.

Originally published by CIMB Research and Economics on 14 March 2019.

This article has been edited to reflect its time-sensitivity.