Bimb Research Highlights

Malaysia Economy - IPI growth and manufacturing sales moderates in May

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Publish date: Fri, 13 Jul 2018, 05:11 PM
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Bimb Research Highlights
  • May IPI eased to 3.0% yoy; recovered to 3.1% mom
  • Moderation production in manufacturing and contraction in mining sector
  • Manufacturing sales moderated in May
  • Productivity slowed to 3.8% yoy
  • Global semiconductor posted highest ever monthly sales in May
  • Global industrial production remains intact
  • Trade uncertainties could pose challenging second half to production and trade

Moderate industrial production in May

Malaysia’s industrial production index (IPI) eased to 3.0% yoy in May after posting a 4.6% rise in the previous month. It is the weakest growth in industrial output since February, as production grew at a slower pace for manufacturing (May: 4.1%; Apr: 5.3%) and electricity (May: 2.6%; Apr: 5.8%). In addition, mining output declined by 0.5%, reversing from a 1.8% rise in a month earlier. On monthly basis, the IPI recovered to 3.1% yoy in May from -3.5% in the preceding month. The improvement in monthly production was buttressed by all sectors which shows a favourable increase in manufacturing (May: 3.2%; Apr: -2.1%), mining (May: 3.1%; Apr: -8.2%) and electricity (May: 2.5%; Apr: -1.2%).

Moderation production in manufacturing and contraction in mining sector

The slower industrial production in May was mainly due to the moderation of output in manufacturing sector. The slower growth in manufacturing production in May was dragged by an easing broad-based output from the major subsectors namely electrical and electronic equipment products (May: 4.8%; Apr: 7.1%), petroleum, chemical, rubber and plastic products (May: 3.7%; Apr: 4.0%) and non-metallic mineral products, basic metals and fabricated metal products (May: 5.0%; Apr: 5.1%). As manufacturing sector accounted 68.25% of the total weightage of the industrial production index for 2015 base year, it gives major impact to the overall industrial production growth in Malaysia.

Furthermore, the production in mining sector contracted by -0.5% yoy in May from 1.8% in the preceding month. The decrease was triggered by the decline in natural gas index (May: - 4.8%; Apr: -0.4%). Nevertheless, crude oil index rose by 4.7%.

Besides manufacturing sector, production by electricity sector also grew at a slower pace in May as compared to the month earlier (May: 2.6%; Apr: 5.8%). The growth in May was even less than half of the last month’s growth.

Manufacturing sales eases in May

Manufacturing sales in May eased to 5.5% yoy from 8.2% yoy increase in the previous month. The manufacturing sector recorded a sales value of RM65.3bn in May, with an increase of RM3.4bn as compared to RM61.9bn reported a year ago. The growth for the month was impelled by the increase in E&E products (May: 7.5%; Apr: 13.9%), petroleum, chemical, rubber and plastic products (May: 6.8%; Apr: 6.3%), and non-metallic mineral products, basic metal & fabricated metal products (May: 4.3%; Apr: 0.7%).

On monthly basis, the sales value declined 0.2% (RM0.1bn) as compared with the previous month. On a seasonally adjusted mom, the sales value in May 2018 shows no changes (Apr: 5.1%).

Manufacturers added more workers during the month as reflected in the hiring of workers where total employees engaged in the manufacturing sector in May was 1,070,000 persons, an increase of 1.7% or 18,077 persons as compared to 1,051,923 persons in May 2017. On monthly basis, the number of employees grew by 0.06% as compared to 1,069,410 persons in the previous month.

Salaries & wages paid in May 2018 grew marginally lower to 10.0% yoy (RM346.8m). When compared to the previous month, the total amount paid in May 2018 decreased -0.4% (RM14.7m) to register RM3.8bn. The average salaries & wages paid per employee registered RM3,562 in May 2018, a rise of 8.2% yoy and a decrease of 0.4% mom.

Productivity or average sales value per employee in May 2018 grew by 3.8% yoy. On monthly basis, it contracted by -0.3% mom to register RM61,071.

Global semiconductor posted highest ever monthly sales in May

According to data from the Semiconductor Industry Association (SIA), global sales of semiconductors reached USD38.7bn for the month of May, an increase of 21.0% yoy and 3.0% mom. The global semiconductor market has posted consistent growth of greater than 20.0% for 14 consecutive months, and May 2018 marked the industry’s highest-ever monthly sales. Higher sales were recorded across all major regional markets and all semiconductor product categories.

Global industrial production remains intact

Industrial production in the US increased 3.5% yoy in May, following an upwardly revised 3.6% rise in April. It is the lowest annual growth rate in industrial output in four months. China's IPI rose by 6.8% yoy in May, following a 7.0% gain in the previous period as production increased at a slower pace for manufacturing (May: 6.6%; Apr: 7.4%). In contrast, Japan’s IPI increased 4.2% yoy in May.

Regionally, the industrial production remained stabled in May. Industrial production in Singapore expanded 11.1% yoy in May, higher than the 9.1% yoy expansion registered a month ago. Excluding biomedical manufacturing, output grew 9.8% yoy (-1.2% mom SA) in May. The electronics cluster continued on an expansionary path for the 27th consecutive month and gained 17.1% yoy in May. Industrial production in Thailand rose by 3.2% yoy, following a downwardly revised 3.1% growth a month earlier.

Trade uncertainties could pose challenging second half to production and trade

Industrial production growth eased to 3.0% yoy in May. Exports also grew considerably slower by 3.4% yoy in May after surging 14.0% in the preceding month. Slowdown in Malaysia’s external trade activities particularly domestic exports derails overall IPI, factory output and also manufacturing sales.

Forward-looking indicators suggest choppy to slower industrial production and export growth in 2H18. Global manufacturing PMI continues to slide while emerging market risks escalate amid mounting trade tensions and higher global interest rates. Malaysia’s latest manufacturing PMI suggests lacklustre manufacturing demand.

At this juncture, it is really important to be cautious with what is happening in the US trade policies. We are watchful of the potential negative spillovers from the US-China trade tensions. Although there are potential areas that Malaysia may benefit due to the diversion of trade flows, the broader picture remains negative should more countries resort to retaliatory tariffs.

Following China’s tit-for-tat response to US trade tariffs of 25% on USD34bn worth of Chinese imports which took effect on 6 July, US President Trump returned the serve by instructing the US Trade Representative to release a new round of 10% tariffs on new list of Chinese goods valued at USD200bn. The new tariffs are not immediate as the public consultation process is set to take place until 30 August. If the latest tariff proposal does take effect, then Trump’s administration will have implemented tariffs on nearly half of US’ imports from China.

Risk of trade tensions escalating into a “trade war” has definitely increased with the latest US’ actions which came quickly after the first round of tariffs just went into effect on 6 July, indicating that Trump has not budged on his tough stance on China. While there still remains hope for some resolution instead of further spiralling trade measures, the outlook has become more uncertain. Such policy response would ultimately induce uncertainties among the business communities. As such, the external demand in the 2H18 looks increasingly challenging.

Source: BIMB Securities Research - 13 Jul 2018

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