IPI growth slightly moderated to +3.9% YoY in Jun (May: +4.0% YoY), close to consensus estimate of +3.8% YoY. The moderation was due to slower manufacturing (+3.8% YoY; May: +4.2% YoY) and electricity production (+1.7% YoY; May: +4.6% YoY) which offset the stronger growth in mining production (+4.6% YoY; May: +3.0% YoY). In 2Q19, IPI growth quickened to +3.9% YoY (1Q19: +2.7% YoY).

DATA HIGHLIGHTS

IPI growth was marginally slower at +3.9% YoY in Jun (May: +4.0% YoY), close to consensus estimate of +3.8% YoY. The moderation in growth was attributed to slower manufacturing (+3.8% YoY; May: +4.2% YoY) and electricity production (+1.7% YoY; May: +5.7% YoY) which offset the stronger growth in mining production (+4.6% YoY; May: +3.0% YoY) (refer to Figure #1). In 2Q19, IPI growth rose +3.9% YoY (1Q19: +2.7% YoY), driven mainly by the recovery in mining production (+3.3% YoY; 1Q19: - 1.9% YoY).

Growth in the manufacturing sector was supported by the domestic-oriented sector, albeit at a slightly slower pace (+4.7% YoY; May: +4.8% YoY), as the rise in non metallic mineral & metal products (+4.8% YoY; May: +3.8% YoY) was offset by moderation in ‘food, beverages & tobacco’ (+3.9% YoY; May: +4.4% YoY) and transport equipment production (+5.6% YoY; May: +6.9% YoY). Vehicle production also slowed (+8.0% YoY; May: +9.3% YoY), which could be due to shorter working month during the Raya period.

The export-oriented sector recorded a slower pace of growth (+3.4% YoY; May: +3.9% YoY). This was due to moderation in ‘textiles, wearing apparel, leather products and footwear’ (+5.5% YoY; May: +5.8% YoY), ‘wood products, furniture, paper products, printing’ (+4.7% YoY; May: +6.5% YoY), ‘petroleum, chemical, rubber and plastic products’ (+3.0% YoY; May: +3.2% YoY) and ‘electrical and electronics’ production (+3.5% YoY; May: +3.7% YoY).

Meanwhile, the mining sector accelerated to +4.6% YoY (May: +3.0% YoY), the fastest pace since Sep 2017. The sector was driven by acceleration in natural gas production (+13.0% YoY; May: +7.6% YoY) due to low base effect from the unexpected closure of Kebabangan gas field in Sabah. This offset the faster decline in crude petroleum production (-3.7% YoY; May: -2.0% YoY) possibly due to maturing oil fields as well as extension of OPEC and non-OPEC agreement to curtail production. On a monthly basis, both LNG and crude petroleum production declined by -5.1% (May: +3.5%) and -2.5% (May: +4.0%) respectively.

HLIB’s VIEW

Malaysia’s diversified economic structure and improvement in mining production has given Malaysia’s IPI growth an edge over its regional peers. Nevertheless, manufacturing sector which accounts for 68% of IPI are showing signs of moderation, as seen by slower growth in manufacturing sales (+5.3% YoY; May: +6.7% YoY) and employment. Employees engaged in the sector as well as manufacturing wages continued to ease to +1.1% YoY (May: +1.4% YoY) and +3.1% YoY (May: +4.1% YoY) respectively. On the global front, the steep decline in semiconductor sales (- 16.8% YoY; May: -14.6% YoY) also point to continued weakness in the global manufacturing sector. This is expected to be exacerbated by escalation in US-China trade tensions if President Trump follows through on his threat of new tariffs on Chinese imports. On this note, we expect BNM to reduce OPR by 25bps as early as November 2019 MPC meeting.

Source: Hong Leong Investment Bank Research - 13 Aug 2019