IPI growth decelerated in October to +0.3% YoY (Sep: +1.7% YoY), partly due to high base effect. This was lower than the consensus estimate of +1.6% YoY. The slowdown in growth was due to larger decline in mining production (-5.8% YoY; Sep: -1.6% YoY), slower manufacturing (+2.2% YoY; Sep: +2.5% YoY) and electricity production (+0.5% YoY; Sep: +4.1% YoY). The global manufacturing sector showed tentative signs of recovery as global manufacturing PMI edged back into expansion (50.3; Oct: 49.8). Nevertheless, while there is a de escalation of trade tensions in the immediate term, risks to growth remain tilted to the downside. Hence, we maintain our expectation for BNM to reduce OPR by 25bps by 1H 2020.

DATA HIGHLIGHTS

IPI growth decelerated to +0.3% YoY in October (Sep: +1.7% YoY), partly due to high base effect. This was below the consensus estimate of +1.6% YoY. The weaker growth was due to larger decline in mining production (-5.8% YoY; Sep: -1.6% YoY), slower manufacturing (+2.2% YoY; Sep: +2.5% YoY) and electricity production (+0.5% YoY; Sep: +4.1% YoY) (refer to Figure #1). Meanwhile, on a monthly basis, IPI growth rebounded (+3.2%; Sep: -0.3%) after posting four months of decline. This was driven by rebound in mining (+8.8%; Sep: -1.0%), electricity (+0.9%; Sep: -2.7%) and pickup in manufacturing production (+1.9%; Sep: +0.1%).

Manufacturing production moderated to +2.2% YoY (Sep: +2.5% YoY) on the back of softer growth in the domestic-oriented sector (+2.5% YoY; Sep: +3.5% YoY) which offset the slight uptick in the export-oriented sector (+2.1% YoY; Sep: +2.0% YoY). Lower growth in the domestic-oriented sector stemmed from lower growth across food, beverages & tobacco (+0.8% YoY; Sep: +1.5% YoY), non-metallic mineral & metal products (+3.1% YoY; Sep: +3.8% YoY) and transport equipment (+4.3% YoY; Sep: +6.3% YoY).

Meanwhile, the uptick in the export-oriented sector was driven by higher growth in textiles, wearing apparel, leather products and footwear (+5.4% YoY; Sep: +4.0% YoY) and electrical and electronics (+2.4% YoY; Sep: +0.8% YoY). The faster growth in electrical and electronics largely emanated from acceleration in manufacture of diodes, transistors and similar semiconductor devices (+5.6% YoY; Sep: +0.5% YoY). This offset the moderation in wood products, furniture, paper products, printing (+4.6% YoY; Sep: +5.8% YoY) and petroleum, chemical, rubber and plastic products (+1.0% YoY; Sep: +2.1% YoY).

In the mining sector, production shrank -5.8% YoY (Sep: -1.6% YoY) due to decline in crude petroleum (-5.1% YoY; Sep: -4.7% YoY) and natural gas production (-6.3% YoY; Sep: +1.1% YoY). However, on a monthly basis, crude petroleum production surged by +9.2% (Sep: +0.4%) while natural gas production strongly rebounded (+8.5%; Sep: -2.1%).

HLIB’s VIEW

The softer growth in the manufacturing sector was in line with slower manufacturing sales during the month (+2.2% YoY; Sep: +2.9% YoY), alongside slower growth in wages (+2.5% YoY; Sep: +2.8% YoY) and employees engaged (+1.0% YoY; Sep: +1.2% YoY). While the global manufacturing PMI showed tentative signs of recovery (50.3; Oct: 49.8), Malaysia’s manufacturing PMI remained in contractionary territory (Nov: 49.5; Oct: 49.3). Despite the de-escalation of trade tensions in the immediate term, we opine that risks to growth remain tilted to the downside over the longer-term. Hence, we maintain our expectation for BNM to reduce OPR by 25bps by 1H 2020.

Source: Hong Leong Investment Bank Research - 13 Dec 2019