IPI growth slowed to +1.2% YoY in July (Jun: +3.9% YoY), which was significantly below market expectations of +3.1% YoY growth. The slower growth was attributed to sharp decline in mining production (-8.4% YoY; Jun: +4.6% YoY), which offset higher gains in manufacturing (+4.0% YoY; Jun: +3.8% YoY) and electricity production (+2.0% YoY; Jun: +1.7% YoY). Although the manufacturing sector has remained resilient against weak global trade activity, we expect the sector to grow at a more modest pace as the US-China trade dispute drags on with negative impact on global demand.

DATA HIGHLIGHTS

IPI growth slowed to +1.2% YoY in July (Jun: +3.9% YoY), which was significantly lower than the consensus estimate of +3.1% YoY. Growth was weighed down by sharp decline in mining production (-8.4% YoY; Jun: +4.6% YoY), offsetting higher gains in manufacturing (+4.0% YoY; Jun: +3.8% YoY) and electricity production (+2.0% YoY; Jun: +1.7% YoY) (refer to Figure #1).

Growth in the manufacturing sector was mainly driven by the export-oriented sector (+4.4% YoY; Jun: +3.4% YoY) amid moderation in the domestic-oriented sector (+3.3% YoY; Jun: +4.7% YoY). In the export-oriented sector, production was higher across the board, which includes ‘textiles, wearing apparel, leather products and footwear’ (+5.8% YoY; Jun: +5.5% YoY), ‘wood products, furniture, paper products, printing’ (+5.6% YoY; Jun: +4.7% YoY), ‘electrical and electronics’ (+4.9% YoY; Jun: +3.5% YoY) and ‘petroleum, chemical, rubber and plastic products’ (+3.4% YoY; Jun: +3.0% YoY). The higher growth in textile, wood and plastic production could be attributed to the trade diversion impact following the ongoing US-China trade dispute.

In the domestic-oriented sector, the moderation in growth was due to deceleration in ‘food, beverages & tobacco’ (+0.7% YoY; Jun: +3.9% YoY) which could be attributed to normalisation post Raya festivities in June.

Meanwhile, non-metallic mineral & metal products grew at a slower pace (+4.4% YoY; Jun: +4.8% YoY) while transport equipment rose at a faster pace (+5.8% YoY; Jun: +5.6% YoY). Meanwhile, growth in the mining sector sharply contracted by -8.4% YoY (Jun: +4.6% YoY). Weakness in the sector stemmed from a steeper drop in crude petroleum production (-22.7% YoY; Jun: -3.7% YoY) amid a moderation in natural gas production (+7.3% YoY; Jun: +13.0% YoY). The decline in crude petroleum production may be attributed largely to the temporary closure of Gumusut-Kakap oilfield for maintenance works in July. Production is anticipated to normalise in August 2019.

HLIB’s VIEW

The domestic manufacturing sector has remained resilient against the backdrop of weak global trade activity, recording higher growth in manufacturing sales (+6.0% YoY; Jun: +5.3% YoY), employees engaged (+1.3% YoY; Jun: +1.1% YoY) and manufacturing wages (+3.4% YoY; Jun: +3.1% YoY). Nevertheless, growth in the sector is expected to record a more modest pace in the future as trade tension hit global demand. The outlook for the global manufacturing sector remains cloudy as the US-China trade dispute drags on amid a maturing technology cycle. This is reflected by continued double-digit decline in global semiconductor sales (-15.5% YoY; Jun: - 16.8% YoY), and is expected to weigh on Malaysia’s E&E manufacturing and export performance. Global manufacturing PMI also remained in contractionary territory (Aug: 49.5; Jul: 49.3), indicating continued weakness in the sector. On this note, we expect BNM to reduce OPR by 25bps as early as November 2019 MPC meeting.

Source: Hong Leong Investment Bank Research - 12 Sept 2019