Petaling Jaya (The Star/ANN) - Economists are cautiously optimistic on Malaysia's economy despite the Industrial Production Index (IPI) showing a contraction when compared with the preceding month.
According to the Statistics Department, the IPI climbed 1.4 per cent in July compared with a year ago, disappointing consensus estimates that expected a growth of 3 per cent. Output declined by 4.7 per cent compared with June.
The growth was underpinned by the stronger performance of the manufacturing sector, with the index rising by 5.5 per cent.
While on a seasonally adjusted month-on-month basis, the IPI in July contracted by 4.7 per cent which was attributed by the reduction in all indices. Manufacturing contracted 3.4 per cent, mining (10.2 per cent) and electricity (1.8 per cent).
"Going forward, we maintain our view that sluggish performance in exports in the near term, which will be offset partially by robust domestic consumption and investment activities. In this regard, we maintain our forecast at 4.5 per cent to 5 per cent in third quarter of 2012, moderating from 5.1 per cent in first half of 2012.
"For the full-year, we maintain our gross domestic product (GDP) forecast at 4.7 per cent in 2012," said Alliance Research chief economist Manokaran Mottain in a report.
He said growth would likely be spearheaded by Economic Transformation Programme (ETP) as well as the 10th Malaysia Plan, which would have spill-over to the services and manufacturing sectors.
"On the demand front, we expect continued boost from domestic demand, especially in investment and consumption spending in the private sector," he said.
Dissecting the numbers from the fresh data, he said the July IPI for manufacturing activity was still on a low-gear, as it has posted a marginal month-on-month drop of 3.4 per cent. Index-wise, the manufacturing sector is still weak compared with March (118.4 in July versus 125.3 in March).
"The expected downtrend is supported by recent drop in the JPMorgan Global Manufacturing PMI (Purchasing Managers' Index) to 48.1 in August, as output and new orders fell at their fastest pace in over three years. The US ISM factory index fell from 49.8 to 49.6 in August, while China's official PMI contracted for the first time since November 2011 (49.2 in August)," he said.
Malaysian Rating Corp Bhd chief economist Nor Zahidi Alias said the slower IPI growth was consistent with slower export performance of -1.9 per cent year-on-year following weaker external demand.
"Going forward, we think that the weakness in the industrial production will continue before it starts to recover in the final quarter this year. It is noteworthy that the US ISM new orders index (which has high correlation with Malaysian exports and IPI) has averaged 53.5 year-to-date till August, which is within our expectation," he said.
He said the level was consistent with Malaysia's IPI growth of 3 per cent to 6 per cent, suggesting that the second half GDP growth would likely be in the range 4.5 per cent to 5 per cent, and would take the overall GDP growth to around 5 per cent this year.
Meanwhile, monthly manufacturing statistics showed sales value of the manufacturing sector for July recorded a modest growth of 5.2 per cent to 52.5 billion ringgit (US$16.91 billion) compared with a year ago, but decreased by 0.6 per cent as compared with the preceding month.