Production in the month of August accelerated to 6.5% YoY from a revised 0.6% in July, above market polls of 5.1%. This is largely due to a strong pull by the manufacturing sector as well as a fair contribution from mining. In the coming months, we expect the production of goods, particularly E&E, to remain steady on global demand, led by the US. That being said, we are not expecting the same level of growth as seen in the 1H14 as a high base effect will somewhat mitigate gains. Nevertheless, momentum from the earlier part of the year will support our GDP 2014 forecast of 6.0%.

- Industrial production in August saw an annual growth of 6.5% YoY after a revised 0.6% (0.5% previously) moderation in July. This beats market expectations of 5.1%. The 3-month moving average (3mma) which helps smoothen out seasonal distortions saw production gaining by 4.6% after 4.4% previously. On a monthly comparison production rose by 2.0% MoM (July: -2.9% MoM) as companies return to a full working month after prolonged holidays due to the Eid celebrations previously. The seasonally adjusted index increased by 3.4% MoM and for the first eight months of the year, production increased by an average of 4.8% YoY, compared to 3.8% seen in the same period a year ago.

- The manufacturing sector expanded by 7.4% YoY, following a revised 3.2% (3.1% pre-revision) in July. The 3mma showed a 6.5% increase, slightly slower than 6.7% registered previously. Along with a 0.6% MoM fall, it could mean that production may slack slightly in the near future. However, this is expected to pick up in preparation for year-end festivities. Year-to-date growth for the sector averaged at 6.7%, versus 3.9% in the same time frame in 2013.

- Upon closer scrutiny of this sector, the production of petroleum, chemical, rubber & plastic products (25% share of manufacturing) a 0.7% YoY rise (July:-0.2%) and a 0.7% MoM increase. At 16.6% share of total manufacturing, the output of electrical and electronics (E&E) goods managed to register double-digit growth of 11.8%. However, there was a 4.7% fall on a monthly comparison, which leads to a little bit of worry as the previous month has lesser working days. This could be seen demand for E&E wavering, but we’re not too worried as global sales of semiconductors remained strong (+9.4% in August, at a record high of US$28.4b). The moderation could be a slight blip before preparation for year-end holiday season.

- The production of non-metallic mineral products, basic metal and fabricated metal products (7.5% of total manufacturing) increased by 7.9% YoY, following a 1.3% moderation in July but the monthly comparison suffered a 2.4% MoM fall. The transportation equipment & other manufactures sub-sector

remains strong with a double-digit growth of 18.6% (July: 12.1%) though saw a 5.5% MoM decline. This sub-sector is expected to remain robust for years to come, in conjunction with development and infrastructure works under the ETP and the 10th and 11th Malaysia Plans. However, the pace may taper off due to a high base effect.

- On a side note, manufacturing sales in August rose by 5.0% YoY, from 1.4% previously. The monthly comparison saw a 1.7% MoM gain and seasonally adjusted value recorded a 3.4% MoM rise.

- In the mining sector, production in August rebounded by 3.6% YoY after it fell by 7.8% in July. This is largely due to the 8.2% rebound (July: -15.5%) in production of natural gas. However, the extraction of crude petroleum & condensates fell by 0.3%, albeit at a smaller rate compared to 0.8% in the previous month. Overall mining increased by 11.2% MoM and by 9.4% MoM based on the seasonally adjusted index.

- Electricity production grew by 8.4% YoY in August, following a 4.9% increase previously, in tandem with manufacturing growth. However, it fell by 1.5% MoM on a monthly comparison but the seasonally adjusted index showed a 2.5% MoM increase.

- Though there was a healthy recovery in the month of August, details (especially concerning the manufacturing sector and E&E production) indicate that there could be some growth moderation to come. However, we don’t expect that to be prolonged as year-end festivities should spur production. Nevertheless, due to a high base effect and uncertainties of growth in the Eurozone, Japan and China, overall production is likely to taper in the 2H14. Thankfully, domestic consumption in light of year-end festivities will help mitigate the downside effects of any possible slack coming from external demand. Alongside momentum coming from the 1H14, we are retaining our 2014 GDP forecast of 6.0% (1H14: 6.3% vs 2H14F: 5.7%).

Source: Kenanga