This article first appeared in The Edge Financial Daily on December 13, 2019

KUALA LUMPUR: The 0.3% growth in Malaysia’s Industrial Production Index (IPI) for October — the slowest since February 2013 — has raised concerns about economic growth in the fourth quarter of this year (4Q19).

RHB Research Institute economist Ahmad Nazmi Idrus said if the IPI remains soft in the coming months, the country may experience a weaker gross domestic product (GDP) growth in the quarter.

“While the impact from the reduction in mining production is likely to be temporary, weakness in global trade should remain for some time. As such, we maintain our outlook for GDP growth at 4.3% for 2020 — weaker than the 4.5% estimated for this year,” he said in a note yesterday.

Malaysia’s GDP growth slowed to 4.4% in 3Q19, from 4.9% in 2Q19. The economy grew 4.5% in 1Q19.

The October IPI, released yesterday by the Department of Statistics Malaysia, showed a year-on-year (y-o-y) growth moderation in manufacturing (2.2%) and electricity production (0.5%), while mining activity remained in contraction of 5.8%.

With the weakening IPI, Ahmad Nazmi noted that the manufacturing sales growth has decelerated. Factories reduced their pace of hiring, while growth in salaries and wages paid to workers also declined.

“As a result, the manufacturing sector’s productivity growth (as measured by the sales value of manufactured products per employee) moderated to 1.2% [y-o-y in October] (versus 1.7% in September 2019), while salaries per employee remained fairly levelled at 1.5%,” he said.

“By performance, it appears that production of domestic-oriented sectors is taking [up] the slack from weaker export-oriented sectors, highlighting the ongoing weakness in global trade, which also affected export growth. Yet the smaller size of domestic sectors cannot fully offset the decline in the external, leading to a weaker growth outlook,” he added.

MIDF Research also foresees the IPI performance to continue expanding at a modest pace in 2020 as the trade war factor remains a major downside risk to global trade activities and manufacturing production in particular, which has the highest weightage in the overall IPI index.

“Nevertheless, firm domestic demand and slight betterment of commodity prices would support domestic-oriented industries and a rebound in mining output next year,” it said.

MIDF Research also expects exports and imports to rebound marginally, especially with the support of commodity outbound shipments.

“Our in-house crude oil price [assumption] is US$65 per barrel for next year. Hence, we believe the price level is supportive and accommodative for mining output to recover in 2020. Manufacturing output [is expected] to grow at [a] modest pace due to challenging external demand with the US heading for its presidential election by year end,” it said.

Affin Hwang Capital’s Alan Tan expects Malaysia’s real GDP to expand by 4.7% in 4Q19, supported by healthy domestic demand, especially from growth in private consumption, amid a healthy labour market, steady income growth and expectations of higher festive spending during the quarter.

“We also anticipate growth in private investment to recover, supported partly by higher approved investments, which cumulatively amounted to RM296 billion between 2018 and June 2019. For full-year 2019, we expect real GDP growth to average around 4.7%, the same rate of expansion as last year,” he said in a note yesterday.

“In 2020, we remain cautious about uncertainties on the external front, but we expect Malaysia’s real GDP growth to expand to 4.5%, slightly slower than the 4.7% estimated for 2019,” he added.