IPI growth eased to +1.7% YoY in Feb (Jan: +3.2% YoY), below the consensus estimate of +2.2% YoY. The slower growth stemmed from a steeper decline in mining production (-5.0% YoY; Jan: -0.9% YoY) amid moderations in manufacturing (+3.7% YoY; Jan: +4.2% YoY) and electricity production (+4.9% YoY; Jan: +7.8% YoY). In the near term, IPI manufacturing sector is expected to remain modest pending developments in US-China trade negotiations.

DATA HIGHLIGHTS

IPI growth slowed to +1.7% YoY in Feb (Jan: +3.2% YoY), which was lower than the consensus estimate of +2.2% YoY. The steeper decline in mining production (-5.0% YoY; Jan: -0.9% YoY) alongside moderations in manufacturing (+3.7% YoY; Jan: +4.2% YoY) and electricity production (+4.9% YoY; Jan: +7.8% YoY) dragged on overall growth (refer to Figure #1). Nevertheless, Malaysia’s IPI growth remained above the regional trend. On a seasonally adjusted basis, IPI contracted -2.0% MoM (Jan: +1.2% MoM).

In the manufacturing sector, growth continued to be supported by the domestic - oriented sector amid moderation in the export-oriented sector. Growth in the domestic-oriented sector of +5.8% YoY (Jan: +4.2% YoY) was driven by higher productions in ‘food, beverages & tobacco’ (+6.3% YoY; Jan: +2.6% YoY) and ‘non metallic mineral products, basic metal and & fabricated metal’ (+4.6% YoY; Jan: +4.3% YoY). Transport equipment also rose (+7.1% YoY; Jan: +6.3% YoY) despite the usually slow car sales during the festive period due to base effect.

The export-oriented sector moderated to +2.6% YoY (Jan: +4.2% YoY), consistent with weaker export performance during the month (-5.3% YoY; Jan: +3.1% YoY). Slower growth was seen across productions in ‘textiles, wearing apparel, leather products and footwear’ (+3.6% YoY; Jan: +5.4% YoY), ‘wood products, furniture, paper products, printing’ (+5.5% YoY; Jan: +5.7% YoY), ‘petroleum, chemical, rubber and plastic products’ (+1.6% YoY; Jan: +4.0% YoY) and ‘electrical and electronics’ products (+3.1% YoY; Jan: +3.9% YoY).

The mining sector experienced a steep contraction of -5.0% YoY (Jan: -0.9% YoY) due to declines in crude petroleum (-4.3% YoY; Jan: -2.2% YoY) and natural gas production (-5.6% YoY; Jan: +0.3% YoY). Crude petroleum production is expected to remain on a volatile trend following Petronas’ commitment to reduce oil output till June 2019 while LNG production is anticipated to improve over the longer-run following the return of Kebabangan gas field to full capacity by Aug 2019.

HLIB’s VIEW

Slower pace of industrial production was a reflection of seasonal factors and slower external demand. This trend was consistent across other regional economies with some countries registering a contraction (Korea: -2.7% YoY; Taiwan: -1.8% YoY). In Malaysia, slower manufacturing production was also reflected in lower manufacturing sales (+5.5% YoY; Jan: +7.0% YoY). Number of manufacturing employees engaged was steady at +2.0% YoY (Jan: +2.0% YoY) while wages paid moderated to +7.2% YoY (Jan: +8.9% YoY). In Mar, global manufacturing activity has started to indicate tentative signs of stabilisation (Mar: 50.6; Feb: 50.6). While global trade is anticipated to remain modest pending further details on US-China trade negotiation, growth is anticipated to remain supported by domestic demand activities following continued wage growth and steady employment. We maintain our GDP forecast to moderate to +4.6% YoY (2018: +4.7% YoY).

Source: Hong Leong Investment Bank Research - 12 Apr 2019