IPI grew at a faster pace of +2.6% YoY (June: +1.1% YoY), higher than consensus estimate of +1.4% YoY. The faster growth was driven by increase in manufacturing (+5.2% YoY; June: +4.5% YoY) and electricity production (+4.5% YoY; June: +3.0% YoY) that offset the decline in mining (-5.9% YoY; June: -9.4% YoY). For the remainder of 2018, we expect GDP to grow at a more moderate pace of 4.8% YoY (2017: 5.9% YoY). We also maintain our expectation for BNM to maintain the policy rate at 3.25% for 2018.

DATA HIGHLIGHTS

In July, IPI grew at a faster pace of +2.6% YoY (June: +1.1% YoY), higher than consensus estimate of +1.4% YoY. The faster growth was supported by an acceleration in manufacturing (+5.2% YoY; June: +4.5%) and electricity production (+4.5% YoY; June: +3.0% YoY) that offset the decline in mining production (-5.9% YoY; June: -9.4% YoY) (refer to Figure #1).

MoM on a seasonally adjusted basis, IPI increased by +2.6% (June: -1.0%).

In the manufacturing sector, growth was driven by sharp increase in export-oriented sector (+5.9% YoY; June: +4.5% YoY) and moderation in domestic-oriented sector (+3.9% YoY; June: +4.5% YoY). In the domestic sector, ‘food and beverage’ production declined by -2.9% YoY (June: +3.5% YoY) due to contraction in manufacture of food products. This was partially offset by higher production of ‘non metallic mineral products, basic metal and & fabricated metal’ products (+5.6% YoY; June: +5.2% YoY) and ‘transport equipment and other manufacturers’ (+13.5% YoY; June: +4.7% YoY). The acceleration in ‘transport equipment and other manufacturers’ followed the strong increase in vehicle car sales during tax-holiday period (July: +41.0% YoY; Jun: +28.3% YoY).

Within the export-oriented sector, E&E production grew at a faster pace of +8.0% YoY (June: +5.4% YoY) in line with faster E&E export growth (+23.6% YoY; June: +6.9% YoY). Similarly, wood production rose +6.0% YoY (June: +5.4% YoY), while production of ‘petroleum, chemical, rubber and plastic products’ grew by +4.0% YoY (June: +3.4% YoY). This offset the moderation in textiles production (+3.6% YoY; June: +6.1% YoY).

Mining sector remained choppy as growth registered a smaller contraction of -5.9% YoY (June: -9.4% YoY). Despite the resumption in crude petroleum production (+4.5% YoY; June: -2.2% YoY), natural gas production continued to decline (-15.2% YoY; June: -15.7% YoY). According to industry sources, the decline in LNG production is attributed to the temporary shutdown in natural gas supply from the Sabah Oil and Gas terminal to the Petronas LNG Complex in Bintulu.

HLIB’s VIEW

In the near term, we expect mining production to remain depressed as the natural gas supply may only resume operation towards the end of the year. In the manufacturing sector, global indicators continue to point to growth, but at a slower pace as new orders slowed. On the domestic front, we anticipate motor production to moderate as tax holiday period comes to an end. Consequently, we maintain our expectation for GDP to grow at a more moderate pace of 4.8% YoY (2017: 5.9% YoY). Should trade tensions escalate substantially, this could negatively affect sentiment and investment activity. We also retain our forecast for BNM to maintain the policy rate at 3.25% in 2018 unless GDP surprises on the downside due to significant slowdown in external and private sector spending.

Source: Hong Leong Investment Bank Research - 12 Sept 2018