Malaysia’s industrial production (IP) continued to slow down for the second consecutive month. In February, IP grew at a slower pace by 1.7% y/y from 3.2% y/y in January, bringing the average for the first two months to 2.5%. The slower IP was due to weak mining output which fell by 5.0% y/y from -0.9% y/y in January. Besides, both manufacturing and electricity output grew moderately by 3.7% y/y and 4.9% y/y in February from 4.2% y/y and 7.8% y/y, respectively in January.

We are of the view that the near-term manufacturing prospects are more downbeat as firms are bracing themselves for a continued production cutback reflected by their move to scale back input buying sharply and reduce inventories. Our view is further supported by the more recent manufacturing Purchasing Managers’ Index (PMI) data which deteriorated to a three-month low of 47.2 in March 2019, signalling a worsening of business conditions in contrast with its Asean neighbours. It marked a rapid decline from February’s 49.6 and is the lowest PMI reported since it fell to 46.8 in December 2018.

On the whole, from our very rudimentary computation for 1Q2019 GDP growth, it suggests that the growth is more likely to be lower than 4Q2018’s GDP of 4.7%. Our preliminary estimation suggests the GDP could be in the range of 3.8% to 4.5%. In the meantime, we reiterate our 2019 GDP growth of 4.5% with our downside pegged at 4.0% and upside at 4.7%. With a weak inflation environment, we are of the view that there is adequate room for BNM to cut rates in 2H2019 by 25bps from the current 3.25%.

• Industrial Production (IP) continued to slow down for the second consecutive month. In February, IP grew at a slower pace by 1.7% y/y from 3.2% y/y in January, bringing the average for the first two months to 2.5%. The slower IP was due to weak mining output which fell by 5.0% y/y from -0.9% y/y in January. Besides, both manufacturing and electricity output grew moderately by 3.7% y/y and 4.9% y/y in February from 4.2% y/y and 7.8% y/y, respectively in January.

• On the manufacturing side, we noticed that business conditions remained less exciting. This was reflected by February’s manufacturing Purchasing Managers’ Index (PMI) that dropped to 47.6 from 47.9 in January, pulled down by output, new orders and stagnating job creation. New orders fell due to the wider economic slowdown affecting demand dynamics. Due to falling output and new orders, firms reduced their purchasing activities and inventories, with backlogs of work falling for the sixth month running and stock of purchases declining at a marked pace. Stocks of finished goods were also reduced.

• Although February’s poor data could also be attributed to shorter working days, added with Lunar New Year holidays, we believe the near-term manufacturing prospects are more downbeat as firms are bracing themselves for a continued production cutback reflected by their move to scale back input buying sharply and reduce inventories. Our view is further supported by the more recent manufacturing Purchasing Managers’ Index (PMI) data which deteriorated to a three-month low of 47.2 in March 2019, signalling a worsening of business conditions in contrast with its Asean neighbours. It marked a rapid decline from February’s 49.6 and is the lowest PMI reported since it fell to 46.8 in December 2018.

• Furthermore, while our manufacturing output in February was supported by food, beverages & tobacco industry as well as transport equipment, the early signs of late stage the tech cycle is hurting the electrical & electronics (E&E) segment. Meanwhile, the contraction in the mining sector was due to the decrease in the natural gas output (-5.6% y/y from 0.3% y/y) and crude oil output (-4.3% y/y versus -2.2% y/y).

• On the whole, from our very rudimentary computation for 1Q2019 GDP growth, it suggests that the growth is more likely to be lower than 4Q2018’s GDP of 4.7%. Our preliminary estimation suggests the GDP could be in the range of 3.8% to 4.5%. In the meantime, we reiterate our 2019 GDP growth of 4.5% with our downside pegged at 4.0% and upside at 4.7%. With a weak inflation environment, we are of the view that there is adequate room for BNM to cut rates in 2H2019 by 25bps from the current 3.25%.

Source: AmInvest Research - 12 Apr 2019