IPI growth turned around in Sep (+2.5% YoY; Aug: -0.7% YoY) as operating capacity continued to ramp up based on worker vaccination rates. This exceeded the consensus estimate of +1.7% YoY. Growth was propped up by higher manufacturing (+4.0% YoY; Aug: +0.6% YoY) and electricity production (+0.4% YoY; Aug: -4.8% YoY), which offset the continued decline in mining production (-3.0% YoY; Aug: -4.2% YoY). In 3Q21, IPI shrank -1.1% YoY (2Q21: +22.6% YoY) following negative growth across all sectors.

DATA HIGHLIGHTS

IPI growth rebounded in Aug (+2.5% YoY; Aug: -0.7% YoY), exceeding the consensus estimate of +1.7% YoY. Growth was propped up by higher manufacturing (+4.0% YoY; Aug: +0.6% YoY) and electricity production (+0.4% YoY; Aug: -4.8% YoY), which offset the continued decline in mining production (-3.0% YoY; Aug: -4.2% YoY) (refer to Figure #1).

On a monthly seasonally adjusted basis, IPI rose +4.1% (Aug: +2.3%) following positive momentum in manufacturing (+4.9%; Aug: +5.3%) and electricity (+6.6%; Aug: +2.3%), offsetting the marginal decline in mining production (-0.5%; Aug: -3.8%).

The manufacturing index accelerated to +4.0% YoY (Aug: +0.6% YoY) amid continued growth in the export-oriented sector, albeit at a more moderate pace (+7.6% YoY; Aug: +9.2% YoY) and smaller decline in the domestic-oriented sector (-3.3% YoY; Aug: -16.0% YoY). The export-oriented sector was supported by higher E&E production (+12.3% YoY; Aug: +9.7% YoY), in line with robust global demand for electronics reflected by the US Empire State Manufacturing Future Technology Spending Index (Oct: +26.9; Sep: +33.0). ‘Petroleum, chemical, rubber & plastic products’ moderated (+6.1% YoY; Aug: +14.0% YoY), while ‘wood products, furniture, paper products, printing’ and ‘textiles, wearing apparel, leather products & footwear’ recorded smaller rates of decline of -5.2% YoY (Aug: -11.0% YoY) and -0.6% YoY (Aug: -3.7% YoY) respectively.

Meanwhile, the domestic-oriented sector declined at a slower rate (-3.3% YoY; Aug: -16.0% YoY) following rebound in ‘food, beverages & tobacco’ (+2.1% YoY; Aug: -6.6% YoY) and smaller decrease across ‘transport equipment & other manufactures’ (- 12.7% YoY; Aug: -34.3% YoY). This was consistent with the reopening of domestic economic activity.

Mining production continued to decline, but at a slower pace (-3.0% YoY; Aug: -4.2% YoY) amid moderation in natural gas production (+1.0% YoY; Aug: +1.6% YoY) and smaller magnitude of decline for crude petroleum (-7.7% YoY; Aug: -11.0% YoY). On a monthly basis, natural gas and crude petroleum fell -4.2% (Aug: -3.4%) and -1.1% (Aug: -6.0%) respectively. Low crude petroleum production could be attributed to an unplanned maintenance at the Gumusut-Kakap oilfield, which was shut for maintenance in Aug and will remain so until repair works are carried out in Nov.

HLIB’s VIEW

On the global front, while manufacturing PMI has improved (Oct: 54.3; Sep: 54.1), output growth has slowed (51.6; Sep: 52.1), affected by supply chain disruptions amid input shortages, rising input costs and extended vendor lead times. These disruptions could pose a risk to Malaysia as well, given its deep involvement in the global value chain. The decline in 3Q21 IPI is expected to contribute negatively to 3Q21 GDP as most of Malaysia was still in the stricter NRP phases during the first half of the quarter. We maintain GDP forecast at +4.1% YoY in 2021.

Source: Hong Leong Investment Bank Research - 10 Nov 2021