Industrial production in June increased by 7.0%, above market expectations of 5.0%. This is on account of continued strong growth from manufacturing, particularly from electrical and electronics (E&E) and transport equipment & machinery sectors. We expect production to remain steady for the rest of the year, fulfilling global demand, spearheaded by the US as well as for domestic need, particularly in conjunction with the Economic Transformation Programme (ETP) projects. However, on account of a higher base effect for the 2H14, growth may be slightly tapered moving forward but still remaining on the upside, hence supporting our 2014 GDP growth of 5.5%.

-  Industrial production in June saw an annual growth of 7.0% YoY, higher than the revised 5.9% (6.0% previously) gained in May. This is above market expectations for a 5.0% rise. Based on the 3-month moving average (3mma), production increased by 5.8% from 5.0% in the previous month. On a monthly comparison, production rose by just 0.1% MoM whilst the seasonally adjusted index saw a 0.5% MoM expansion. For the whole of 2Q14, industrial production increased by 5.9% YoY, compared to 4.6% seen in the 1Q14 (or 4.4% QoQ) and saw a 5.3% increase in production for the whole of 1H14 (1H13: 2.6%).

-  The manufacturing sector expanded by 9.1%, stronger than the revised 8.0% (7.8% pre-revision) in May and by 7.4% based on the 3mma, from 6.5% in May. A monthly comparison saw a 1.2%MoM increase in manufacturing growth though the seasonally adjusted index saw a minute 0.3% MoM fall in production. Nonetheless, the 2Q14 manufacturing expanded by an annual rate of 7.4% YoY compared to 6.9% in the previous quarter, or a 6.0% QoQ rise. For the whole 1H14, manufacturing expanded by 7.2% YoY, versus 2.5% seen in the same period 2013.

-  In detail, the production of petroleum, chemical, rubber & plastic products (25% share of manufacturing) saw a 4.8% YoY rise in output, after falling by 3.7% previously and saw a 4.7% MoM increase. At 16.6% share of total manufacturing, the output of electrical and electronics (E&E) goods expanded by 13.7% YoY (May: 10.7%) and by 3.9% compared to the preceding month. The production of E&E goods has been consistently lifting overall production, boosted by strong overseas demand and we expect this trend to continue for the rest of the year. This falls in line with global semiconductor sales which hit an all time high of US$27.6b in June, spearheaded by demand from the Americas (+12.1 YoY) and Europe (+12.1%) as well as the Asia Pacific region (+10.5%).

-  The production of non-metallic mineral products, basic metal and fabricated metal products (7.5% of total manufacturing) increased by 5.4% YoY, from 4.5% previously and increased by 2.3% MoM. The transportation equipment & other manufactures sub-sector continues to expand by double-digits, this time by 25.4% (May: 75.5%) but saw a 9.3% MoM decline. We foresee this subsector and sectors related to major infrastructure projects to remain robust throughout the year, though may post a tapering growth on account of a high base effect.

-  On a side note, manufacturing sales in May increased by 3.8%, a slower growth compared to 5.5% in May. On a monthly comparison, sales rose by 0.5% MoM but fell by 1.5% based on the seasonally adjusted value.

-  Production in the mining sector rose by 1.4% YoY, following a revised increase of 0.4% in May. This is due to a rise in the extraction of crude petroleum & condensates (+1.5%) and production of natural gas (+1.3%). However, there was a 3.2% MoM decline in overall mining but a 0.9% increase based on the seasonally adjusted index. For the 2Q14, mining increased by 1.9%YoY (1Q14: -1.0%) and by 0.4% for the 1H14 (1H13: 2.4%).

-  Electricity production grew by 6.5% YoY (May: 4.6%) and by 0.8% MoM, in tandem with the expansion in output from the manufacturing sector.

-  Given the strong industrial output performance in the 2Q14 especially in manufacturing we expect GDP growth to remain strong. However, as the base effect begins to wear off we expect the 2Q14 YoY GDP growth to taper to 5.7% from 6.2% in 1Q14. Moving forward, we reckon that industrial production will remain steady throughout the year, supported by production for exports as well as to fulfill domestic demand, particularly for continuous works under the ETP. This should help to mitigate any downside effect as a result of a higher base in the 2H13. All in all, the strong momentum in 1H14 would support the growth trajectory in the 2H14, reinforcing our GDP forecast of 5.5% for the whole of 2014.

Source: Kenanga