Malaysia: February 2018 industrial production

HIGHLIGHTS

February 2018 industrial production

• Malaysia’s Feb IPI expansion of 3.0% yoy missed forecasts, but Jan’s manufacturing output numbers were revised sharply higher due to the rebasing of the index.
• Output growth moderated broadly across the domestic and export-oriented sectors.
• Upward revisions in Jan and a modest slowdown in Feb suggest that industrial activity remains supportive of our GDP growth forecast of 5.2% in 2018.

Feb IPI growth lags forecasts but Jan’s data revised sharply higher
Industrial production index (IPI) growth slipped to 3.0% yoy in Feb, below our and market forecasts of stronger growth (CIMB: +3.5% yoy, Bloomberg consensus: +3.3% yoy). Strikingly, Jan’s expansion was revised higher to 5.4% yoy from 3.0% yoy, due to sharp upward alterations to the manufacturing sector, bringing industrial activity closer in line with the strong export figures in Jan. The seasonally-adjusted IPI contracted sharply by 4.4% mom in Feb, but Jan’s initially reported decline of -1.0% mom was revised to an increase of +5.2% mom.

Business activity winds down over CNY break…
Manufacturing activity took a breather (+4.7% yoy in Feb vs. +6.9% yoy in Jan) as businesses wound down during the Chinese New Year celebrations. The mining production index fell 1.6% yoy in Feb (+1.5% yoy in Jan), while the electricity index rose 2.8% yoy in Feb (+4.3% yoy in Jan).

…in export- and domestic-oriented industries
Broad-based moderation in output gains were recorded across the export- and domestic-oriented sectors in Feb, such as electric & electronic products, wood & paper, rubber & plastics, and textiles. Growth in the food, beverages and tobacco segment slipped sharply (+2.1% yoy in Feb vs. +16.1% yoy in Jan) as the vegetable and animal oils & fats eased (+1% yoy vs. +33.8% yoy in Jan) on high base effect, while production of transport equipment sank 2.0% yoy (+3.5% yoy in Jan) on the back of lower production of passenger cars, ships and floating structures.

Malaysia manufacturing PMI slips to 5-month low
Malaysia’s manufacturing PMI declined to 49.5 pts in Mar from 49.9 pts in Feb. Weaker output and order book visibility resulted in lower backlog, greater destocking and slower purchasing activity among firms surveyed. Some respondents reported higher cost pressures from rising raw material costs, which was partly defrayed by moderately rising average selling prices.

Falling natural gas output weighs on mining production
Upstream O&G production declined in Feb largely due to the natural gas segment (-3.5% yoy vs. +1.5 yoy in Jan). Output of petroleum was also subdued, rising 0.5% yoy in Feb (+1.6% yoy in Jan). However, we expect gains in the downstream O&G sector (+7.7% yoy in Feb vs. +6.7% yoy in Jan) to be sustained as capacity gradually comes onstream in projects like Pengerang.

Industrial sector faring better than expected after data revisions
The upward revisions to the IPI data in Jan and moderate slowdown in Feb indicate that economic momentum in the industrial sector is keeping pace (+4.3% yoy in 2M18 vs. +3.5% in 4Q17), rather than decelerating. We reiterate our real GDP growth forecast of 5.2% in 2018 (BNM: 5.5% to 6.0%). Key risks to the outlook include: 1) escalating global trade tensions, 2) slower-than-expected growth in G3 and China, 3) tightening global financial conditions, and 4) spillovers from increased volatility in the financial markets.

Originally published by CIMB Research and Economics on 11 April 2018.