REVIEW

Producer Price Index (PPI) delivered a disappointing performance amid a widening contraction in September vis-à-vis August, dashing hopes that PPI could be on track for a sustained recovery. PPI for September slipped to a YoY decline of 2.4% (August: -1.9%) on the back of a deeper contraction in mining (-14.4%) and lack of improvement in manufacturing (-1.0%).

The declines in mining, coincidentally our lowest for the year, is worrying as this may take a toll on exports and growth momentum given that mining represents about 7% of the economy. The lethargic momentum by manufacturing is not a surprise as demand has remained feeble due to the failure of the US and China to find resolutions over their trade issues.

PPI’s YTD average of -2.0% (YTD 2018: -0.9%) may not recover soon as global sentiment remains weak due trade uncertainties. This is also consistent with the less-than-encouraging September PMI manufacturing index that stayed below the neutral level (49.7) amid the difficulty of manufacturers to raise prices due to challenging external conditions.

On a MoM basis, PPI saw a rebound of 0.7% (August: 0.2%), pushed by commendable recovery in mining (+7.0%; August: -2.0%) and a slight improvement in manufacturing (0.3%; August: 0.0%). The less-than-sanguine YTD PPI mirrors the weak CPI which has remained lethargic in 2019 (YTD September: 0.6%). Four of the PPI’s sub-indexes produced uninspiring numbers in September led by mining (-14.4%), water (-2.8%), agriculture, forestry and fishing (-1.1%) and manufacturing (-1.0%). Only electricity and gas supply delivered positive numbers for the month (1.3%).

Mining sector performance deteriorated further in September (-14.4%; August: - 10.9%), a reflection of global oil prices which remained weak due to challenging conditions caused by trade tensions and a prospect of policy rate movement in advanced economies. The outlook on mining and manufacturing could improve once there is a resolution in the US – China trade dispute, a prospect we cautiously expect in 2020, if not earlier.

CATALYSTS IN 2019 and 2020

US and China are reportedly hard at work finalizing the details of the ‘Phase 1’ trade deal. Though there is no deadline over this and there is no certainty that there will be a deal but a ‘work-in-progress’ deal is better than a no deal at all. This gives hope that our key sectors (manufacturing, mining) may receive a lifeline should a deal be signed. This should help to boost our high frequency data, PPI included, with an expected positive spillover effect to headline growth.

OUTLOOK

It has been more than a year since we last saw an expansion in the PPI numbers and this could change soon driven by a prospective trade deal between the US and China. A full resolution is not possible but a piece-meal resolution is good enough which could provide a jolt to global sentiment, a prospect eagerly awaited by emerging economies, with Malaysia one of them. Nonetheless, there should be a degree of caution over this given past failures in reaching a deal.

Source: PublicInvest Research - 13 Nov 2019