KUALA LUMPUR (Feb 11): Although Malaysia's industrial activities grew strongly in December, economists have expressed caution on further growth in the light of China's slowing economic growth and the continuing depressed global oil prices.
AllianceDBS Research economist Manokaran Mottain, while noting the December Industrial Production Index's rise to 7.4% had exceeded consensus expectation of a 4.1% growth, said the momentum was unlikely to continue or accelerate further.
“Although it was the strongest growth recorded in 2014, we view this strong performance cautiously since, we believe that the performance is unlikely to persist or accelerate further in the coming months.
In fact, IPI growth in the second half of 2014 had moderated to 5.0% from 5.3% in first half of 2014, Mottain said.
Mottain sees major downside risks to the Malaysian economy arising from both external and domestic factors.
External factors that would impact Malaysia’s economy includes the slowing economic growth in China which could drag the global supply chain of trade activities while depressed oil prices would slow down mining sector activities, he said.
Recent data showed China’s imports contracted 19.9% in January (weakest performance since 2009) while its manufacturing Purchasing Managers Index (PMI) fell into contractionary territory (Jan15: 49.8 vs Dec14: 50.1).
“Besides, we continue to anticipate that the depressed crude oil prices will slow down the mining sector activities in the short to medium term. Oil exports have contracted in recent months and the downward trend is soon to be joined by weaker Liquefied natural gas (LNG) exports,” Mottain said.
“Business sentiments index in the fourth quarter 2014 (4Q14) had fallen to 86.4 (3Q14:95.9), and we expect the cost-push inflation with the goods and services tax (GST) implementation to further dampen the already fragile sentiments,” he added.
“Full-year 2014 GDP growth of around 5.8% is more or less a foregone conclusion. Moving forward, we are cautious that the slowing domestic economy could pose a downside risk to our full-year 2015 GDP projection of 5%,” he added.
The note was published after the IPI announcement yesterday, and ahead of the Gross Domestic Product (GDP) announcement by the Bank Negara Malaysia (BNM) tomorrow.
Meanwhile, Moody's economist Matthew Circosta said that the industrial production's strong finish to 2014 posed upside risk to its fourth quarter Malaysian GDP forecast.
“Our 5.3% estimate could be on the low side, as strength in tech production and construction is helping to offset a slowdown in the energy sector. A reading of 5.6% or more would mean GDP growth reached 6% for all of 2014, which, excluding the recovery from the global recession in 2010, would mark Malaysia’s best result since 2007,” Circosta said.
He also noted that the impact of low oil prices, which fell 50% from October to December, is negative for Malaysia because the country is a net energy exporter.
Yet the weaker ringgit, which at RM3.58/USD sits around a six-year low against the dollar, appears to be mitigating some of the effects by improving competitiveness for other export products.
Domestic demand is also growing at a steady clip thanks to low unemployment and the government's infrastructure program, he added.
However, he warned that lower oil prices could take a bigger economic toll in early 2015 with falling profits at big state-owned oil companies already forcing the government to cut spending plans.
“On the positive side, an easing inflation outlook gives the central bank room to keep rates on hold for longer. The policy rate is expected to remain at 3.25% through 2016,” Circosta said.