Malaysia: Industrial production likely to show improvement in the near term

PETALING JAYA: The country’s industrial production is expected to remain weak in the first quarter of the year (1Q23), before showing improvement in the near term.

Despite the potential risk of weak global demand, there are bright spots that could raise the industrial production performance going forward, analysts noted.

TA Research said although there is a potential risk of weak global demand negatively impacting industrial output, recent improvements in the local manufacturing sector are cause for optimism.

“Despite six consecutive months of contraction in the Malaysian manufacturing purchasing managers’ index (PMI), the S&P Global Malaysia manufacturing PMI improved to 48.4 points in February, up from 46.5 points in January. Output and new order data showed signs of improvement.

It estimates that a one-point increase in PMI would result in a 0.10% increase in manufacturing output and a 0.07% increase in gross domestic product (GDP).

If PMI were to reach 50 points, the research house expects manufacturing output and overall GDP to grow by 5.1% and 3.6% respectively, all else being equal.

A reading above 50 signals expansion while below 50 means contraction.

“We maintain a positive outlook for the industrial output in 2023 and project an industrial production index (IPI) growth rate of 3.7%, down from 6.7% in 2022,” it said.

IPI growth slowed to 1.8% year-on-year (y-o-y) in January this year from 2.8% y-o-y in December 2022, missing consensus expectations of 2.3% y-o-y.

Growth was weighed down by a steeper decline in electricity production as well as slower manufacturing production, offsetting the pick-up in mining production.

Kenanga Research said manufacturing output is expected to be particularly weak in 1Q23 due to poor external demand and tepid global economic conditions. However, it said there is potential for exports to recover in the short-term following the end of major festive periods, especially in China.

It said manufacturing growth should be supported by robust domestic demand, spurred by an expected increase in tourist arrivals.

Kenanga said the PMI showed a slight improvement in February, indicating a fledgling recovery in output despite remaining in the contractionary zone.

“We raised our 2023 GDP forecast to 4.7% (2021: 8.7%) from 4.3%, due to expectations of robust domestic demand, continued fiscal support and tailwinds from China’s reopening. However, 1Q23 growth may slow down due to fragile global economic conditions and weaker external demand,” it said.

Downside risks to overall growth remain from the Russia-Ukraine conflict, tenuous Sino-American relations and possible recessions among major economies,” it said.

Meanwhile, on the global front, Hong Leong Investment Bank Research said global manufacturing PMI registered a reading identical to a no-change mark in February, halting a five-month run of contractions.

The upturn in output volume was driven by Asia, benefiting from China’s economic reopening and easing supply constraints.

“Nevertheless, despite the improvement in global sentiment, Malaysia’s industrial production is still expected to remain modest amid a more moderate external demand environment compared to the previous year,” it added.

Source: https://www.thestar.com.my/business/business-news/2023/03/15/industrial-production-likely-to-show-improvement-in-the-near-term