This article first appeared in The Edge Financial Daily on April 12, 2019

KUALA LUMPUR: Malaysia’s industrial production index (IPI) grew at only 1.7% year-on-year (y-o-y) in February 2019 as the manufacturing and electricity sectors’ indices expanded at a slower pace while the mining sector saw a bigger contraction.

This marks the slowest growth in eight months since June 2018 at 1.4%.

According to the Department of Statistics, manufacturing output grew 3.7% y-o-y, moderating from 4.1% yoy in the prior month. The electricity segment increased 4.9% compared with 7.8% y-o-y in January.

Meanwhile, mining output has been on the decline for two consecutive months, falling 5% y-o-y in February as a result of lower global oil prices.

“The major sub-sectors which recorded an increase in February 2019 were food, beverages and tobacco products (6.3%), non-metallic mineral products, basic metal and fabricated metal products (4.6%), and electrical and electronics products (3.1%),” it said.

MIDF Research said the IPI performance is in tandem with the slowdown in external trade in February.

It pointed out that the country’s total exports dropped 5.3% y-o-y, the lowest in more than two years attributable to a long Chinese New Year holidays. Domestic exports grew slightly by 0.6% y-o-y, marking the third consecutive month of growth while re-exports, which have low domestic value-added, posted a double-digit contraction of 28%, the worst since August 2014.

Moving forward, MIDF forecasts Malaysia’s IPI performance to remain positive due to strong domestic demand and stable job market which would support domestic-oriented industries, particularly consumer-based products.

Furthermore, it noted that IPI performances across major and emerging economies also moderated in February due to concerns over Sino-US trade tension, geopolitical stress in Europe and volatility in global commodity prices.

However, MIDF believes there will be a slight pick-up in global demand, especially with the US and China expected to sign a trade deal in the near time.

As such Malaysia’s IPI performance moving forward would also be supported by steady global demand particularly in the US and China besides gradual pick-up in global commodity prices and currencies, it said.

“As guided by the recent Business Tendency Survey data, we believe Malaysia’s IPI will be growing at between 3% and 4% during the first half of 2019. Referring to the survey, services and manufacturing sectors are expected to continue to drive up Malaysia’s economy while the mining sector is predicted to recover modestly. Among others, steady external trade performance, upbeat domestic demand and gradual increase in energy prices will boost industrial activity in Malaysia.

“Lower business costs, partly due to moderating inflation and stable retail fuel prices, will provide additional boost for industrial production growth, which is expected to hit 2.9% in 2019.

“Nevertheless, headwinds from global trade tension and supply disruption for commodity-based sectors could pose downside risk to the estimate,” it said.