UPDATE 1-Malaysia's Aug factory output falls for first time in 13 months

By Anuradha Raghu

KUALA LUMPUR, Oct 11 (Reuters) - Malaysia's factory output shrank for thefirst time in 13 months in August, although the decline was less than expected,reflecting the weakness in its export markets, official data showed on Thursday.

The industrial production index fell 0.7 percent from a yearearlier in August, dragged down by manufacturing while electricity and mining,which make up the rest of the gauge, held up.

A Reuters poll had forecast a 2.0 percent decline in output in August.

Manufacturing and mining together account for 35 percent of Malaysia's grossdomestic product, which grew a surprisingly strong 5.4 percent in the secondquarter thanks to a jump in private and government investment.

"The index came in slightly better than expected but the general pictureremains that industrial production will remain rather sluggish over the next fewmonths, given the non-improvement in global economic conditions," said BankIslam chief economist Azrul Azwar Ahmad Tajudin, adding the slump in exports hasweighed on factory output.

However, he added that strong domestic demand has helped prop up theindustrial production index from a more severe fall.

Last week the government revealed a 4.5 percent year-on-year drop in Augustexports, the biggest decline in nearly three years as shipments to the EuropeanUnion and China plunged.

Some economists say the weak export data could raise the chances of thecentral bank easing monetary policy in its last interest rates meeting of theyear on November 8, although others keep their forecasts pat at 3.00 percent.

"We must accept the reality that we have entered into a period of aslowdown, but we are not falling off the cliff," Azrul added.

"Perhaps export-oriented industries are affected but it won't translate intomassive job losses. Unless that happens, I think there is no strongjustification for a rate cut. The best option will be for rates to stay put forthe rest of the year."

Despite the headwinds, Malaysia's government expects the economy to grow at4.5 to 5.0 percent for the year and 4.5-5.5 percent in 2013.

Within the region, Thailand's factory output in August fell a bigger thanexpected 11.32 percent while Singapore's output contracted from a year earlierfueling concerns of the city-state slipping into a recession this quarter.

(Reporting by Anuradha Raghu; Editing by Sanjeev Miglani)

((anuradha.raghu@thomsonreuters.com)(+603 2333 8040)(Reuters Messaging:anuradha.raghu.thomsonreuters.com@thomsonreuters.net))