KUALA LUMPUR (Aug 8): As Malaysia's Industrial Production Index (IPI) declined 2.2% year-on-year (y-o-y) in June 2023, economists remain cautious on the industrial production outlook and do not rule out that the performance may be weaker than anticipated.

In a statement by the Department of Statistics, Malaysia (DOSM) on Tuesday (Aug 8), Malaysia's IPI contraction from positive growth of 4.7% y-o-y in May 2023 was mainly attributed to lower output from the manufacturing and mining sectors. Notably, this is the second contraction recorded this year.

The manufacturing sector registered a negative growth of 1.6% in June 2023 against a 5.1% increase recorded in May 2023, while the mining sector contracted 6.4% in June compared to a 2.9% growth in May. Meanwhile, the output growth of the electricity sector moderated to 2.8% in June 2023 from 5.9% in the preceding month.

On a month-on-month (m-o-m) comparison, the IPI, however, grew 2.2% after surging 7.3% the previous month.

For the first six months of 2023, IPI growth moderated to 1.3% as compared to 5.4% recorded in the same period of the previous year. The expansion was supported by the manufacturing index (+1.7%) and the electricity index (+1.6%). The mining index inched down by 0.4%.

In a research note on Tuesday (Aug 8), RHB Research cut Malaysia’s gross domestic product (GDP) forecast to 3.5% y-o-y from its previous estimate of 4.5% y-o-y in view of lacklustre performance in both the manufacturing and services sectors.

However, the research house maintained its recovery view for the second half of 2023 with GDP growth averaging at 5.2% y-o-y.

RHB expects the IPI momentum to stabilise in the upcoming months with m-o-m growth averaging around 0.3% to 0.4%, in tandem with gradual improvement in trade activities and external demand.

"We are already noticing early signs of a bottoming-out process in trade, industrial production, retail sales and PMI data in some developed and emerging economies," it said.

Looking into 2H2023, RHB expects the growth driver to be externally facing sectors, namely the manufacturing sector, given the recovery of the global economy and improvement in external demand, alongside the regularisation of retail sales and consumer spending amid higher living costs and the dissipation of pent-up demand.

The research outfit pointed out that the softening of manufacturing sector activities was driven mainly by export-oriented industries where output declined 3.9% y-o-y compared to 2.8% in May.

On a similar note, MIDF Research said the pace of decline in IPI growth was sharper than market forecasts, with expectation that the weakness, particularly in mining and manufacturing sectors, could follow in a similar trend in export performance.

MIDF said while the slower production in the construction sector may result in slower investment and business spending, it expects this will be offset by rising consumer spending and recovery in services exports, adding that these will drive Malaysia's GDP growth in the remainder of 2023.

Additionally, the recent purchasing managers' index (PMI) for the manufacturing sector indicated that businesses scaled back production and hirings due to softening demand. MIDF warned that should production continue to decline, it will impact the outlook for both energy demand and electricity output.

MIDF maintained its 2023 IPI growth forecast at 2.2% as it anticipates production and overall economic growth to moderate this year. Nonetheless, it remains cautious that the outlook could be weaker than expected considering that IPI growth moderated at 1.3% y-o-y in 1H2023, compared to 5.4% y-o-y in 2HFY2022.

"On that note, we foresee weak external demand and global manufacturing activities will continue to affect IPI outlook. However, resilience in domestic demand will lend support to the overall demand outlook this year," MIDF Research commented, adding that it views several factors constraining production outlook, such as increased decline in external demand, elevated inflation and renewed rise in production costs.

In the DOSM statement, chief statistician Datuk Seri Dr Mohd Uzir Mahidin said June was the second contraction in export-oriented industries this year, following the initial decline in April. The contraction was in line with the country's export performance, which dropped 14.1% this June, alongside numerous countries across the globe.

“A similar situation was also experienced by numerous countries globally, grappling with uneven external demand for goods, thus impacting the performance of country’s export-oriented industries in June 2023,” he added.