In November, industrial production (IP) rose moderately by 2.5% y/y from 4.3% y/y in October. The manufacturing sector grew by 3.6% y/y from 5.4% y/y while the electricity output edged up 3.2% y/y in November versus 2.8% y/y in October. The mining sector, on the other hand, declined by 0.7% y/y from a gain of 1.4% y/y in October.

With December’s manufacturing IP number turning out to be disappointing, we foresee business conditions will remain challenging. Based on the headline Nikkei’s Manufacturing Purchasing Managers’ Index (PMI), it contracted further to 46.8 in December from 48.2 in November.

On that note, we foresee growth prospects to remain weak. In our view, 4Q2018 GDP should ease to around 4.0% to bring the full-year growth to 4.6%. With our base case GDP outlook for 2019 at 4.5% and the upside at 4.8%, we foresee further weakening pressure on growth in 1Q2019. We believe the economy should start to register a slight improvement in the 2Q2019 and pick up thereafter, partly benefitting from the low base besides support coming from domestic activities and complemented by exports as the electronics cycle slows down, added with softer commodity price.

• In November, industrial production (IP) rose moderately by 2.5% y/y from 4.3% y/y in October supported by the manufacturing sector as well as electricity output. The manufacturing sector grew by 3.6% y/y from 5.4% y/y while the electricity output edged up 3.2% y/y in November versus 2.8% y/y in October. The mining sector, on the other hand, declined by 0.7% y/y from a gain of 1.4% y/y in October.

• The drag in the mining sector was primarily due to a fall in natural gas output, down 1.8% y/y in November compared with 2.3% y/y in October while the crude oil output edged higher to 0.6% y/y versus 0.4% y/y in October. We expect the mining sector to remain weak owing to supply disruption in Kebabangan gas field but foresee recovery sometime mid-2019 when production hits full capacity again.

• Meanwhile, manufacturing output continued to grow at a favourable pace. In the month of November, its output grew 5.4%y/y from 4.8%y/y in September. Production from the electrical & electronic (E&E) segment lent support, up 5.3% y/y in November from 7.1%y/y in October. Besides, positive output from resource-based products such as petroleum, chemical, rubber, and plastic also boosted manufacturing output.

• Manufacturing sales also rose 7.7% y/y in November compared with 10.2% y/y in October. Hiring pace and wages in the manufacturing sector remain favourable, up 2.0% y/y and 9.0% y/y in November compared with 2.2% y/y and 10.2% y/y, respectively in October. Lastly, productivity, measured by sales value per employee, expanded 5.6% y/y in November from 7.8% y/y in October.

• With December’s manufacturing IP number turning out to be disappointing, we foresee business conditions will remain challenging. Based on the headline Nikkei’s Manufacturing Purchasing Managers’ Index (PMI), it contracted further to 46.8 in December from 48.2 in November.

• The data points to the sharpest deterioration in the health of the goods-producing sector since May. It also extended the current period of decline to two months. The drag largely came from severe reductions in production and new businesses. Besides, we noticed forward-looking gauges also indicate downside risks with overall demand to be weak, thus causing companies to become less willing to hold stocks.

• On that note, we foresee growth prospects to remain weak. In our view, 4Q2018 GDP should ease to around 4.0% to bring the full-year growth to 4.6%. With our base case GDP outlook for 2019 at 4.5% and the upside at 4.8%, we foresee further weakening pressure on growth in 1Q2019. We believe the economy should start to register slight improvement in the 2Q2019 and pick up thereafter, partly benefitting from the low base besides support coming from domestic activities and complemented by exports as the electronics cycle slows down, added with softer commodity price.

Source: AmInvest Research - 14 Jan 2019