IPI growth was steady at +1.7% YoY in September (Aug: +1.7% YoY), in line with the consensus estimate. Growth was sustained by surge in electricity production (+4.1% YoY; Aug: +0.3% YoY) and slower decline in mining production (-1.6% YoY; Aug: -3.9% YoY) amid moderation in manufacturing production (+2.5% YoY; Aug: +3.6% YoY). In 3Q19, IPI decelerated to +1.6% YoY (2Q19: +3.9% YoY).

DATA HIGHLIGHTS

IPI grew at a steady pace of +1.7% YoY (Aug: +1.7% YoY), in line with the consensus estimate. Growth was supported by acceleration in electricity production (+4.1% YoY; Aug: +0.3% YoY) and slower decline in mining production (-1.6% YoY; Aug: -3.9% YoY) amid moderation in manufacturing production (+2.5% YoY; Aug: +3.6% YoY) (refer to Figure #1). On a monthly basis, IPI continued to decline at a steady pace (- 0.3%; Aug: -0.3%) as lower mining (-1.0%; Aug: +4.2%) and electricity (-2.7%; Aug: - 1.1%) offset the marginal rebound in manufacturing production (+0.1%; Aug: -1.5%).

Manufacturing production growth was led by the domestic-oriented sector, albeit at a slower pace (+3.5% YoY; Aug: +3.9% YoY). Growth was driven by higher transport equipment (+6.3% YoY; Aug: +5.9% YoY) amid moderation in food, beverages & tobacco (+1.5% YoY; Aug: +2.4% YoY) and non-metallic mineral & metal products (+3.8% YoY; Aug: +4.1% YoY).

Meanwhile, the export-oriented sector slowed to +2.0% YoY (Aug: +3.4% YoY), consistent with September’s weak export performance (-6.8% YoY; Aug: -0.8% YoY). ‘Electrical and electronics’ decelerated to (+0.8% YoY; Aug: +3.1% YoY), the slowest growth since December 2015. This was driven by sharp deceleration in manufacture of diodes, transistors and similar semiconductor devices. Meanwhile ‘textiles, wearing apparel, leather products and footwear’ (+4.0% YoY; Aug: +6.0% YoY) and ‘petroleum, chemical, rubber and plastic products’ (+2.1% YoY; Aug: +3.0% YoY) moderated. This offset the pickup in ‘wood products, furniture, paper products, printing’ (+5.8% YoY; Aug: +5.6% YoY).

Production in the mining sector declined at a slower pace of -1.6% YoY (Aug: -3.9% YoY) due to a softer decline in crude petroleum production (-4.7% YoY; Aug: -9.5% YoY) amid slight moderation in natural gas production (+1.1% YoY; Aug: +1.2% YoY). However, on a monthly basis, crude petroleum decelerated (+0.4%; Aug: +6.0%) while natural gas contracted by -2.1% (Aug: +2.8%).

HLIB’s VIEW

In 3Q19, IPI decelerated to +1.6% YoY (2Q19: +3.9% YoY) due to decline in mining (- 4.7% YoY; 2Q19: +3.3% YoY) and moderation in manufacturing (+3.4% YoY; 2Q19: +4.1% YoY) and electricity production (+2.1% YoY; 2Q19: +4.4% YoY). Slower activity in the manufacturing sector was reflected by softer manufacturing sales (+4.5% YoY; 2Q19: +6.3% YoY) and wages (+3.2% YoY; 2Q19: +3.9% YoY). Nevertheless, growth in employees engaged picked up (+1.3% YoY; 2Q19: +1.1% YoY). Although Malaysia’s manufacturing PMI improved in October (49.3; Sep: 47.9), it still remained in contractionary phase, in line with global manufacturing PMI (49.8; Sep: 49.7). New export orders on the global front continued to decline (48.9; Sep: 48.0). This suggests continued weakness in global trade which will continue to affect Malaysia’s export-oriented manufacturing sector. Unless further clarity is provided regarding terms of the US-China “phase one” trade deal, this trend of prolonged trade uncertainty is expected to extend into 2020. On this note, we maintain our expectation for BNM to have an easing bias and reduce OPR by 25bps by end-1Q 2020.

Source: Hong Leong Investment Bank Research - 18 Nov 2019