IPI grew at a slower pace of +3.0% YoY (Apr: +4.6% YoY, in line with consensus estimate. The slower growth was affected by decline in mining production (-0.5% YoY; Apr: +1.8% YoY), deceleration in manufacturing (+4.1% YoY; Apr: +5.3% YoY) and electricity production (+2.6% YoY; Apr: +5.8% YoY). This was partly due to shortened working days following GE-14 election period in May 2018. While we expect GDP to grow at a more moderate pace due to trade spat, base effect and lower inventory restocking activity, we see higher global downside risk. Should trade tension escalate further, this could significantly affect sentiment and investment activity. Nevertheless, we maintain our expectation for GDP to grow at +5.2% YoY (2017: 5.9% YoY) and BNM to maintain the policy rate at 3.25% for 2018.

DATA HIGHLIGHTS

In May, IPI grew at a slower pace of +3.0% YoY (Apr: +4.6% YoY), in line with consensus estimate. The slower growth emanated from decline in mining production (-0.5%; Apr: +1.8% YoY), deceleration in manufacturing production (+4.1% YoY; Apr: +5.3% YoY) and electricity production (+2.6% YoY; Apr: +5.8% YoY) (refer to Figure #1).

MoM on a seasonally adjusted basis, IPI rose by +0.2% (Apr: +1.5%).

In the manufacturing sector, growth was affected by deceleration in export-oriented sector (+4.0% YoY; Apr: +4.6% YoY) and domestic-oriented sector (+4.4% YoY; Apr: +5.2% YoY) due to shortened working days following the GE14 period. In the domestic sector, production of food and beverage product moderated (+3.4% YoY: Apr: +4.6% YoY), as well as transport equipment (+4.9% YoY; Apr: +6.8% YoY). This was offset the increase in printing production (+3.2% YoY; Apr: +0.6% YoY) and non metallic mineral production (+6.0% YoY; Apr: +5.4% YoY).

Within the export-oriented sector, E&E production grew at a slower pace of +4.8% YoY (Apr: +6.6% YoY) in line with slower E&E export growth (+2.2% YoY; Apr: +21.4% YoY). Similarly, textiles production moderated to +1.7% YoY (Apr: +2.2% YoY), while wood production also decelerated (+3.2% YoY; Apr: +3.6% YoY). This offset the increase seen in refined petroleum products (+3.0% YoY; Apr: +2.9% YoY).

Mining sector remained choppy as growth registered a contraction of -0.5% YoY (Apr: +1.8% YoY). This was due to larger decline in natural gas production (-4.8% YoY; Apr: -0.9% YoY) that offset the faster increase in crude petroleum (+4.7% YoY; Apr: +4.4% YoY). Mining sector output is also expected to remain volatile in the near-term following high base effect and Petronas commitment to reduce 20,000bpd in line with OPEC and non-OPEC action to curtail output until the end of 2018.

HLIB’s VIEW

Near-term outlook for manufacturing IPI remains in expansionary mode as indicated by continued growth in forward indicators. In Jun, global manufacturing sector lost further momentum (53.0; May: 53.1) as output and new order slowed. Concerns on trade dispute also weighed on business optimism. While we expect GDP to grow at a more moderate pace due to trade spat, base effect and lower inventory restocking activity, we see higher global downside risk. Should trade tension escalate further, this could significantly affect sentiment and investment activity. Nevertheless, we maintain our expectation for GDP to grow at 5.2% YoY (2017: 5.9% YoY) and BNM to maintain the policy rate at 3.25% in 2018 unless GDP surprises on the downside.

Source: Hong Leong Investment Bank Research - 13 Jul 2018