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 the first 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 year earlier 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 gross domestic product, which grew a surprisingly strong 5.4 percent in the second quarter thanks to a jump in private and government investment.

"The index came in slightly better than expected but the general picture remains that industrial production will remain rather sluggish over the next few months, given the non-improvement in global economic conditions," said Bank Islam chief economist Azrul Azwar Ahmad Tajudin, adding the slump in exports has weighed on factory output.

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

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

Some economists say the weak export data could raise the chances of the central bank easing monetary policy in its last interest rates meeting of the year 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 a slowdown, but we are not falling off the cliff," Azrul added.

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

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.

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 earlier fueling 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))