IPI growth grew at a faster pace to +1.9% YoY in August (Jul: +1.2% YoY), slightly below the +2.0% YoY consensus estimate. The increase in growth was due to slower decline in mining production (-3.9% YoY; Jul: -8.4% YoY), deceleration in manufacturing production (+3.7% YoY; Jul: +4.0% YoY), and slower growth in electricity production (+0.3% YoY; Jul: +2.0% YoY). While there are recent signs of optimism on US-China trade talks front, we opine that uncertainty for businesses remain as existing tariffs are still in place with structural issues yet to be resolved.

DATA HIGHLIGHTS

IPI expanded by +1.9% YoY in August (Jul: +1.2% YoY), slightly below the consensus estimate of +2.0% YoY. Growth was led by manufacturing production, albeit at a slower pace (+3.7% YoY; Jul: +4.0% YoY), slower growth in electricity (+0.3% YoY; Jul: +2.0% YoY) amid slower decline in mining production (-3.9% YoY; Jul: -8.4% YoY) (refer to Figure #1). On a monthly basis, IPI registered a softer decline (-0.2%; Jul: -0.4%) amid lower manufacturing (-1.3%; Jul: +2.0%), electricity (-1.1%; Jul: +7.2%) and rebound in mining production (+4.2%; Jul: -10.7%).

Manufacturing growth was mainly driven by the domestic-oriented sector (+4.2% YoY; Jul: +3.3% YoY), which saw a pickup in ‘food, beverages & tobacco’ (+2.9% YoY; Jul: +0.8% YoY) and transport equipment (+5.9% YoY; Jul: +5.8% YoY), which offset the softer growth in non-metallic mineral & metal products to +4.3% YoY (Jul: +4.4% YoY).

Meanwhile, the export-oriented sector moderated to +3.5% YoY (Jul: +4.4% YoY), in line with weaker export performance in August (-0.8% YoY; Jul: +1.7% YoY). The sector slowed on the back of moderation in ‘petroleum, chemical, rubber and plastic products’ (+2.8% YoY; Jul: +3.4% YoY) and ‘electrical and electronics’ (+3.5% YoY; Jul: +4.9% YoY). This offset the higher growth in ‘textiles, wearing apparel, leather products and footwear’ (+6.0% YoY; Jul: +5.8% YoY) and ‘wood products, furniture, paper products, printing’ (+5.9% YoY; Jul: +5.6% YoY).

In the mining sector, the decline in production softened to -3.9% YoY (Jul: -8.4% YoY), emanating from slower decline in crude petroleum production (-9.5% YoY; Jul: - 22.7% YoY) and sharp moderation in natural gas production (+1.2% YoY; Jul: +7.3% YoY). On a monthly basis, both natural gas and crude petroleum production rebounded by +2.8% (Jul: -6.9%) and +6.0% (Jul: -15.1%) respectively. The recovery in crude petroleum production may be attributed to normalisation in production following temporary closure of Gumusut-Kakap oilfield for maintenance works in the previous month.

HLIB’s VIEW

The domestic manufacturing sector has showed signs of moderating activity, reflected by slower growth in manufacturing sales (+4.7% YoY; Jul: +6.0% YoY) and manufacturing wages (+3.3% YoY; Jul: +3.4% YoY) amid stable growth in employees engaged (+1.3% YoY; Jul: +1.3% YoY). Although global manufacturing PMI improved, it still remained in contractionary territory (Sep: 49.7; Aug: 49.5) as new orders continued to decline (49.4; Aug: 49.0). While there have been positive developments on recent US China trade talks, uncertainty remains on the existing tariffs and structural issues. Hence, the possibility of more tariffs in the future remain which may lead to continued uncertainty until a complete agreement is signed.

Source: Hong Leong Investment Bank Research - 14 Oct 2019