• May IPI slowed to 1.1% yoy; fell by 0.5% mom
• A huge decline of production in mining sector
• Manufacturing sales picked up in June
• Productivity rose by 5.5% yoy
• Global semiconductor continues to post impressive sales in 1H18
• Global industrial production remains strong
• IPI to expand at moderate pace in 2H18

Slowdown trend in industrial production

Malaysia’s industrial production index (IPI) growth eased to 1.1% yoy in June following a 3.0% increase in the previous month. It was the slowest growth since July 2014 (0.6%). The small increase in IPI was mainly due to the slump in mining sector which plunged by -9.4% in June from -0.5% in May. Nonetheless, it was mitigated by improvements in manufacturing and electricity production in June; 4.5% yoy (May: 4.1%) and 3.0% (May: 2.6%) respectively.

On monthly basis, the IPI fell by 0.5% yoy in June after rising by 3.1% in the preceding month. The decrease in June was propelled by a declining production in mining (Jun: -5.4%; May: 3.1%) and electricity sector (Jun: -4.3%; May: 2.5%). In contrast, production by manufacturing sector posted a 1.5% rise in June from 3.2% in the previous month.

In the 2Q18, the IPI grew by 2.8% yoy, lower than the corresponding period of last year which rose by 3.9%. The rise was supported by manufacturing (2Q18: 4.7%; 1Q18: 5.2%) and electricity sector (2Q18: 3.8%; 1Q18: 3.9%). For 1H18, average IPI growth recorded at 3.4% yoy, lower than previous year growth of the same period (1H17: 4% yoy).

A huge decline of production in mining sector

The moderation of industrial production in June was mainly prompted by the significant contraction in the mining sector. However, the IPI is still in the positive territory as the improvement production in manufacturing as well as electricity counterbalance the huge decline in mining sector.

The production in mining sector plunged by -9.4% yoy in June following a 0.5% drop in the preceding month. The decrease gave a huge impact towards the overall IPI as the mining sector accounted 28.92% over the total weightage of the IPI for 2015 base year. The contraction was pulled down by double digit decline in the index of natural gas (Jun: -15.7%; May: -4.8%) coupled with crude oil (Jun: -2.2%; May: 4.7%).

Nevertheless, the manufacturing sector grew by 4.5% yoy in June from 4.1% in the last month. The rise was supported by electrical and electronic equipment products (Jun: 5.4%; May: 4.8%), petroleum, chemical, rubber and plastic products (Jun: 3.4%; May: 3.7%) and non-metallic mineral products, basic metals and fabricated metal products (Jun: 5.2%; May: 5.0%).

Besides manufacturing sector, production by electricity sector also expanded at a faster pace in June as compared to the month earlier (Jun: 3.0%; May: 2.6%).

Manufacturing sales picked up in June

Manufacturing sales in June picked up 7.8% yoy from 5.5% yoy increase in the previous month. The manufacturing sector recorded a sales value of RM67.1bn in June, with an increase of RM4.8bn as compared to RM62.3bn reported a year ago. The growth for the month was impelled by the increase in E&E products (Jun: 9.2%; May: 7.5%), petroleum, chemical, rubber and plastic products (Jun:7.3%; May: 6.8%), and non-metallic mineral products, basic metal & fabricated metal products (Jun: 6.0%; May: 4.3%).

On monthly basis, the sales value rebounded to 2.7% (RM1.8bn) as compared with the previous month. On a seasonally adjusted mom, the sales value in June 2018 shows a decline of 0.8% after posting no changes in May.

Manufacturers added more workers during the month as reflected in the hiring of workers where total employees engaged in the manufacturing sector in June was 1,070,776 persons, an increase of 2.2% or 22,556 persons as compared to 1,048,220 persons in June 2017. On monthly basis, the number of employees grew by 0.07% as compared to 1,070,000 persons in the previous month.

Salaries & wages paid in June 2018 grew marginally higher to 10.2% yoy (RM357.2m). When compared to the previous month, the total amount paid in June 2018 increased 1.2% (RM45.6m) to register RM3.9bn. The average salaries & wages paid per employee registered RM3,602 in June 2018, a rise of 7.9% yoy and an increase of 1.1% mom.

Productivity or average sales value per employee in June 2018 rose by 5.5% yoy. On monthly basis, it surged by 2.6% mom to register RM62,665.

Global semiconductor continues to post impressive sales in 1H18

According to data from the Semiconductor Industry Association (SIA), global sales of semiconductors reached USD117.9bn during the 2Q18, an increase of 6.0% over the previous quarter and 20.5% more than the 2Q17. Global sales for the month of June 2018 reached USD39.3bn, an uptick of 1.5% mom and a surge of 20.5% yoy. Cumulatively, yearto-date sales during the 1H18 were 20.4% higher than 1H17. Regionally higher sales were recorded in China (30.7% yoy), the Americas (26.7% yoy), Europe (15.9% yoy), Japan (14.0% yoy) and Asia Pacific/All Other (8.6% yoy).

Global industrial production remains strong

Industrial production in the US increased 3.8% yoy in June, following a downwardly revised 3.2% yoy rise in May. It is the strongest annual growth in industrial production since July 2014 as manufacturing went up 1.9%, mining jumped 12.9% and utilities edged 5.0%. For the 2Q18 as a whole, industrial production advanced 6.0% yoy, faster than the 2.4% pace logged in 1Q18 and its third consecutive quarterly increase. China's industrial production rose 6.0% yoy in June, easing from a 6.8% increase in May as output growth slowed for all sectors. In contrast, Japan’s IPI decreased 1.2% in June.

Regionally, the industrial production growth slowed slightly in June. Singapore’s industrial production for June 2018 expanded 7.4% yoy while the May IP growth was revised higher to 12.9% yoy from 11.1% yoy. The electronics cluster continued to anchor Singapore’s manufacturing activity, expanding for the 28th consecutive month although the pace of growth noticeably eased to 7.1% yoy in June from 18.7% yoy in May. Industrial production in Thailand rose by 4.7% yoy following a downwardly revised 2.9% gain in a month earlier. It was the fastest growth in industrial output since January, driven by higher production of cars and parts. Manufacturing production in the Philippines increased by 18.9% yoy in June, after an upwardly revised 21.9% rise in a month earlier. It was the lowest reading since March.

IPI to expand at moderate pace in 2H18

Industrial production growth eased further in June to 1.1% yoy (May: 3.0%; April: 4.6%). Slowdown in Malaysia’s external trade activities particularly domestic exports derails overall IPI. Although Malaysia’s exports expanded by 7.6% yoy in June from 3.4% in May it, however, fell 4.2% mom (May: -2.5%), confirming its yoy growth expansion was largely influenced by preceding year’s lower base. In fact, the decelerating IPI performance is in tandem with Malaysia’s manufacturing PMI which still hovering below expansionary-line of 50 points. July’s PMI expanded marginally to a five-month high at 49.7 (June: 49.5) due to expansion in output whilst new export orders expanded marginally for the first time in six months. However, the new orders declined for the sixth consecutive month in July at a modest rate associated with subdued demand.

Meanwhile, investment among firms are gradually taking a backseat as companies are taking a cautious view to expand its production capacity. This was premised on rising inventory level amidst uncertainty on the external demand outlook. Additionally, employment growth in the manufacturing sector is also growing at a slower pace and this would also mean manufacturers have become increasingly wary to ramp up their production lines in order to avoid excessive inventory level. The latest data suggest that the production activities are gradually shifting into a lower gear. At this juncture, it is really important to be cautious with what is happening in the US trade policies.

Moving ahead, we remain cautious as key manufacturing indicators continue to point towards moderation on the external front. Global manufacturing PMI continues to deteriorate and posted its lowest reading for one year as it fell to 52.7 in July. Growth in manufacturing activities across Asia remained subdued compared to that seen in Europe and the US. Manufacturing PMI readings for China, Japan, India, South Korea, Indonesia, Malaysia, the Philippines, Myanmar and Thailand were all below the global average. Meanwhile, data from Netherlands Bureau for Economic Policy Analysis showed that global industrial production growth has slowed further to 0.0% mom in May from 0.4% in April.

With the US and China trade war tension escalating we expect the risk to Malaysia’s 2H18 trade to be increasingly uncertain due to its position and exposure to the global supply chain particularly in E&E sector. Hence, we are expecting the 2H18 industrial production and export growth to moderate in 2H18 thereby contributing to a lower 2H18 GDP growth.

Source: BIMB Securities Research - 13 Aug 2018