KUALA LUMPUR – Malaysia, South East Asia’s third largest economy, witnessed a larger-than-expected rise in its industrial production (IP) figure in May on the back of an uptick in growth in both the manufacturing and electricity sectors.
IP grew from 1.5 percent in March to 3.2 percent in April, compared to the same time last year, versus the forecasted 2 percent.
The recent figure is also high relative to the historical average: from 2007 to 2012, Malaysia posted an average IP growth rate of 1 percent. Manufacturing growth accelerated from 2.6 percent in March to 5.7 percent year-on-year (yoy) in April, which more than offset the slight slowdown in the electronics sector and the continued contraction in the mining sector due to declining commodity prices.
The rise in IP growth comes in spite of the contraction in exports in April by 0.1 percent yoy, which suggests that the growth in IP should be coming from resilient consumption growth. The contraction in exports was mainly attributed to the fall in global demand for electrical and electronic products and palm oil. Domestic demand however, is expected to remain robust for the next coming months, which could help continue to offset dwindling export demand as the euro zone, which imports about 11 percent of Malaysia’s exports, continues to be plagued by its burgeoning debt crisis. If domestic demand does remain high, then this should keep IP buoyant and in turn help Malaysia achieve its targeted economic growth rate of somewhere between 4 and 5 percent by year-end.
IP is a measure of economic activity, surveying factory production, related manufacturing processes and mining. IP reflects the consumer sentiment and interest rate conditions because levels of production are highly sensitive to those factors.
IP is a coincident indicator, which means that it reflects the current state of the economy. If production activity accelerates, this could mean the economy is recovering or growing, but can also be a warning sign of upcoming rising inflationary pressures.
The relatively strong industrial production figure in Malaysia justifies the central bank’s recent move to leave its key interest rate unchanged at 3 percent, to avoid the risk of over stimulating the economy.
On the other hand, if prices accelerate and the central bank undergoes monetary tightening by raising interest rates in order to curb inflationary pressures, IP, as well as economic activity, could decelerate due to more expensive credit.
Malaysia’s IP will continue to rise, just as long as robust domestic consumption continues to outweigh the fall in exports, as demand from Europe sputters due to its lingering debt crisis. The robust domestic consumption can be mainly attributed to the government’s cash giveaways to the poor and the implementation of the minimum wage for the very first time in May.
Malaysia’s policymakers enacted a minimum wage law to help support low income households, in a bid to achieve a rich nation status by 2020 and amid speculation that the government may call elections soon. The shift from being an export-led economy to a domestically driven economy in Malaysia, to help sustain long-term economic growth, justifies our reasoning as to why Asia will become increasingly attractive in the eyes of investors. – Agencies