Malaysia March 2019 industrial production growth exceeds expectations


HIGHLIGHTS

March 2019 industrial production

  • PI growth rebounded to 3.1% yoy in March as the drag on mining diminished.
  • Seasonal demand and illicit tobacco crackdown helped offset weakness in the construction and electrical & electronics (E&E) segments.
  • A setback in construction activity likely nudged GDP growth lower to +4.4% yoy in 1Q19F, reinforcing BNM’s decision to ease monetary policy on 7 May.

Uptick in March industrial activity emulates trade outperformance
The 3.1% yoy growth in industrial production index (IPI) in March (+1.7% yoy in February) exceeded our and market expectations, due to stronger manufacturing production (+4.1% yoy in March vs. +3.7% yoy in February) and milder mining contraction (-0.2% yoy vs. -5.0% yoy in February). Electricity output growth was steady (+4.8% yoy vs. +4.9% yoy in February). The seasonally-adjusted IPI growth rose 1.2% mom in March (-2.0% mom in February), outperforming the historical March average of -0.5% mom in 2014-2018.

O&G output growth fuelled by export demand
O&G production mirrored the sector’s strong export performance, particularly in natural gas (+1.4% yoy in March vs. -5.6% yoy in February) and refined petroleum products (+4.3% yoy vs. +0.2% yoy in February), making up for the weakness in crude petroleum output (-2.0% yoy vs. -4.3% yoy in February). However, we are monitoring potential disruptions ahead, stemming from maintenance work at the Gumusut-Kakap oilfield in July, as well as repercussions from an investigation into a fire in the Pengerang Integrated Complex (PIC).

Mixed bag for manufacturing sector
Manufacturing activity was boosted by seasonal demand post-Chinese New Year and ahead of Ramadan, lifting output of food (+7.0% yoy vs. +6.6% yoy in February) and textiles, apparels, leather products & footwear (+4.9% yoy vs. +3.6% yoy in February). Tobacco output surged 10.9% yoy (+6.8% yoy in February) from favourable base effects and more stringent enforcement on the illicit cigarettes trade. However metallic and non-metallic building materials growth faltered to a 2-year low (+3.5% yoy in March vs. +4.6% yoy in February) due to subdued construction activity. E&E output rose at the weakest pace since Oct 2014 (+2.7% yoy in March vs. +3.1% yoy in February), and the US’s import tariff hike on US$200bn of China goods could weigh on Malaysia’s export-oriented segments.

1Q19 GDP growth forecast at 4.4% yoy as construction disappoints
While the outturn in the manufacturing, mining and electricity sectors were broadly in line with our projections and agriculture output rebounded in 1Q19, construction activity disappointed as the value of work done stagnated (+0.7% yoy in 1Q19 vs. +4.1% yoy in 4Q18). Uncertain market conditions, reworked project scopes and delayed tenders may have contributed to the weaker growth in civil engineering works and public sector nonresidential construction. We estimate these factors, alongside the rebasing exercise to 2015 constant prices, nudged 1Q19F GDP lower to +4.4% yoy (+4.7% yoy in 4Q18), and in the face of heightened downside risks, reinforce Bank Negara Malaysia’s (BNM) decision to cut the overnight policy rate (OPR) by 25bp to 3.00% on 7 May. We retain our full-year GDP forecast at 4.7% for 2019F.

Originally published by CIMB Research and Economics on 10 May 2019.

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