Malaysia’s industrial production expands at six-month high of 3% in August

Malaysia's industrial production grew at a better than expected rate of 3.0% y-o-y (vs. -0.5% in July). This was driven by growth in petroleum, chemicals and textiles. However, the electronics sector remained weak due to lackluster demand from the West. The latter will likely constrain output going ahead, keeping the central bank on the sideline for the rest of the year.

Facts
Malaysia's August industrial production surprised on the upside, expanding at a six-month-high of 3.0% y-o-y (vs. an upwardly revised estimate of -0.5% for July). This was better than consensus estimate of 0.4% y-o-y (source: Bloomberg) and our more bearish forecast of -1.0%. In seasonally adjusted terms growth accelerated 3.1% m-o-m (vs. 3.5% in July).

Looking into the details, an upswing in the index heavy weight manufacturing (4.8% y-o-y vs. 1.7% in July) led the recovery. Within the manufacturing sector, 'petroleum and chemical products' (12.0% y-o-y vs. -2% in July) and textile products (7.3% y-o-y vs. -0.9% in July) out-performed. On the other hand, as expected, production of 'electrical and electronics' declined 5.0% y-o-y (vs. -1.0% in July) as consumers in advanced economies continue to hold back.

Mining continued to contract in annual terms (-1.4% y-o-y vs. -7.5% in July) but picked up on a sequential basis (+5.6% vs. -3.3% in July). Electricity output, however, slowed to 1.4% y-o-y (vs. 5.0% in July) and also contracted on a sequential basis.

Implication
The better than expected production growth suggests that demand for Malaysian goods is still holding up well, although we are seeing mixed fortunes between the important commodity and electronics sectors. The former is being held up by strong regional demand, while the latter is suffering due to the woes in advanced economies.

Looking ahead, a continued slowdown in global growth will constrain growth in both segments of the industrial sector.

However, solid underpinnings for domestic demand in Malaysia and elsewhere in the region will help cushion the slowdown, although domestic demand growth is also likely to moderate across the region. In addition, the Malaysian government's plan to ramp up expenditure in the second half of 2011 should also provide some impetus to growth.

With growth set to moderate in the months ahead, inflation pressures easing for now, and uncertainty about the global outlook elevated, the central bank will keep rates on hold for the rest of the year.

Bottom line: Malaysia's industrial production rebounded in August led by the commodity segment while output of electronics continues to wane. However, the weak global economic conditions are set to constrain growth in the month ahead and keep the central bank on hold for the rest of the year.