PREVIEW-Malaysia's Aug factory output may have shrunk on weak exports

* August factory output seen down 2.0 oct y/y vs 1.4 pct expansion in July

* Data due on Thursday, Oct 11 at 0401 GMT

By Lilian Loh

Oct 9 (Reuters) - Malaysia's factory output probably fell for the first time in 13 months in August because of weak demand for its top exports of commodities and electronics, analysts polled by Reuters said, warning that the global trade slowdown could get worse.

Malaysia has so far weathered the weakness in its external sector thanks to domestic demand and government spending but the expected drop in industrial production on top of dismal export figures has opened the possibility of a rate cut by the central bank next month.

The Industrial Production Index (IPI)

may have fallen 2.0 percent year-on-year in August after rising 1.4 percent in July and 3.7 percent in June, according to the median forecast of 15 economists.

The last time the IPI, which measures manufacturing, electricity and mining output, showed a decline was July last year.

Manufacturing and mining together account for 35 percent of Malaysia's gross domestic product which grew a surprisingly strong 5.4 percent in the second quarter.

The outlook for manufacturing remained weak, HSBC bank said in a note, because of slowing demand for components and commodities in China and finished goods in the West.

"HSBC's regional PMIs and official trade data suggest a bottom in the global export cycle remains some months away," the bank said.

Manufactured goods make up about two thirds of Malaysia's exports.

Last week, the government announced a 4.5 percent drop in exports in August, the biggest year-on-year decline in nearly three years, on weaker demand from the European Union and China.

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

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

The country's central bank left interest rates unchanged for an eighth consecutive time at its last monetary policy meeting in September, saying domestic demand was helping shore up the economy. Rates have been held at 3.00 percent since May 2011.

Many economists see rates unchanged until next year as domestic consumption is expected to remain resilient on higher government spending and increased investment, and may even pick up ahead of general elections that must be held before April.

But the recent weak data for external demand does raise the possibility of monetary easing at the last interest rate meeting for the year on November 8, one economist said.

"It will be interesting if this could potentially shake the Bank Negara Malaysia's stance when they meet next in early November," said OCBC economist Gundy Cahyadi.

"At this juncture, our baseline scenario still suggests that BNM may hold its rate for the rest of the year, but the chance for a 25 basis points rate cut is increasingly higher now, given the string of bad data we have been getting," he added.

Forecasts for Malaysia's Industrial Production Index (IPI):

FORECASTS August IPI (pct y/y) Median -2.0 High 1.8 Low -3.2 July 1.4 June 3.7 No. of respondents 15 Affin -1.0 Bank Islam -1.9 BofA Merrill Lynch -0.6 Citi -3.2 DBS -2.3 Forecast Pte -2.6 HSBC 0.2 ING -2.0 JP Morgan 1.8 Kenanga -2.0 Maybank -2.3 OCBC -2.5 OSK-DMG -2.1 TA Securities -2.4 UOB -0.9

(Reporting by Loh Li Lian; Editing by Sanjeev Miglani)

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