THE Industrial Production Index (IPI) has been a good gauge of gross domestic product (GDP). It is not a perfect measure as it leaves out the services sector, but it captures the key manufacturing and mining sectors.
Services can be captured indirectly via electricity growth. After all, all businesses use electricity, and as a proxy, that can somewhat capture the essence of the services sector growth.
The latest reading of the IPI for May showed that it rose by 8.4%, with all sectors of the index showing momentum.
The electricity sector grew by 4.2% in May, down from 10.5% in April, but there may be a concern that electricity demand from data centres could skew the IPI reading as the rollout of data centres in the country accelerates.
Data centres today account for 7% of total electricity demand, but this is forecast to rise rapidly to 31% by 2035.
This jump is significant for a single industry as a huge amount of the energy rolled out by power stations will be catered towards data centres.
Based on electricity demand alone, this will push up the electricity growth quantum of the IPI significantly.
The question is whether this will continue to be an accurate representation of GDP growth in the future.
There could be a misalignment between electricity consumption growth and its actual contribution to GDP.
The contribution of data centres to GDP is larger during the construction phase than during the operational phase.
While data centres will create high-paying jobs, the number of jobs created is minuscule compared with the amount of investment that goes towards a data centre.
If the same amount of money is channelled into building semiconductor plants, the job opportunities could potentially be much larger.
Another issue to watch is just who will benefit from the data centres in Malaysia?
The country is still some distance away from fully capitalising on the opportunities created by data centres, despite initiatives such as the Malaysia Digital Action Plan 2030.
The question then is whether Singapore is better positioned to benefit from the high value-added operations associated with the large number of data centres being developed in Johor, given the low latency between the two countries.
